Company balance sheet: 12 things to look for in a company’s balance she... https://economictimes.indiatimes.com/wealth/invest/12-things-to-look-fo...

Business News › Wealth › Invest Search for News, Stock Quotes & NAV's

Benchmarks NSE Gainer-Large Cap FEATURED FUNDS 5Y RETURN Stock Analysis, IPO, Mutual
Funds, Bonds & More
Nifty LIVE NHPC ICICI Prudential Bluech 1.46 %
Fund Direct-Growth
8,447.20 183.75 21.05 2.60
★★★★★
INVEST NOW Market Watch

12 things to look for in a company’s balance sheet

BY NARENDRA NATHAN, ET BUREAU | UPDATED: SEP 16, 2019, 11.03 AM IST Post a Comment

Return on assets, net worth, debt to equity ratio etc., etc. We have heard and read about
Big Change:
these terms, but do we really know what they represent? The July-September quarter is
The end of Five-Year Plans: All you need to know
about to end and we will soon be in the midst of results season. This means that soon
balance sheets of companies will begin to arrive, and it will be time for you, the investor, to understand the ratios that figure in them.

ET Wealth lists out the most important formulae and tells you why they matter.

1. Book value per share

Book value per share = Net worth/Number of outstanding shares

Why it is important: It is used for computing valuation ratios like price to book value ratio.
High book value per share (due to profits accumulated over the years) indicates a strong company.

2. Inventory turnover ratio

Inventory turnover ratio = Sales/Total inventory

Why it is important: Shows how efficiently the company manages its inventory.
The ratio should be compared between industry peers as it tends to be inflated for industries with very low inventories.

3. Return on net worth (RoNW)

Return on net worth (RoNW) = Profit after tax/Net Worth

1 of 4 20-03-2020, 11:56
Company balance sheet: 12 things to look for in a company’s balance she... https://economictimes.indiatimes.com/wealth/invest/12-things-to-look-fo...

Why it is important: Captures the net profit generated on shareholders’ funds.

Companies with low capital base (that don't need additional capital for growth) will show a higher ratio.

4. Cash holding per share

Cash holding per share = Total cash and cash equivalents/Number of outstanding shares

Why it is important: Indicates strength of company; Also used to arrive at valuation ratios.
A high amount of cash per share, if accumulated over the years, again indicates a strong company.

5. Total assets turnover ratio

Total assets turnover ratio = Sales/Total assets

Why it is important: Shows how efficiently the company manages its total assets.
Should be compared within industry because trading companies will show a better ratio here.

6. Return on total assets (RoA)

Return on total assets (RoA) = Profit after tax/Total assets

2 of 4 20-03-2020, 11:56
Company balance sheet: 12 things to look for in a company’s balance she... https://economictimes.indiatimes.com/wealth/invest/12-things-to-look-fo...

Why it is important: Captures the net profit generated on total assets.

More useful for financials because other ratios may not work there.

7. Debt to equity ratio

Debt to equity ratio = Total debt/Net worth

Why it is important: Indicates if a company is capable of fulfilling obligations to creditors.

A high debt to equity ratio is a warning signal, especially in situations like business downturns.

8. Return on capital employed

Return on capital employed (RoCE) = Earnings before interest and tax/Total capital employed
Why it is important: Captures the profit
generated on total capital employed (including
debt).
Companies with low capital base (those that
don't need additional capital for growth) will
display a higher ratio.

9. Free cash flow (FCF)

Free cash flow (FCF) = Net income + non cash expenses like depreciation & amortisation + change in working capital - capital
expenditures

Why it is important: Indicates money left after company meets all operating and capital costs.
High free cash flow means a company is generating more cash than it needs for growth.

10. Net worth

Net worth = Equity capital + accumulated reserves - revaluation reserves - goodwill - accumulated loss
Why it is important: This captures the total funds held by shareholders. Due to accumulated losses, the net worth is negative for
several companies.

11. Current ratio

Current ratio = Current assets/Current liabilities
Why it is important: Low current ratio (less than 1.5) indicates that a company may be getting into shortterm liquidity issues.

3 of 4 20-03-2020, 11:56
Company balance sheet: 12 things to look for in a company’s balance she... https://economictimes.indiatimes.com/wealth/invest/12-things-to-look-fo...

12. Quick ratio

Quick ratio = Current assets - inventories/Current liabilities
Why it is important: Also known as ‘acid test ratio’, very low quick ratio indicates that a company may be getting into short-term
liquidity issues.

Stay on top of business news with The Economic Times App. Download it Now!

4 of 4 20-03-2020, 11:56