Blog · Finance metrics and formulas · Finance and FP&A teams
Balance sheet analysis connects liquidity, borrowing, and movements in assets and equity. Follow a checked comparison from statement exports to a short list of questions for collections, inventory, and treasury owners.
Balance sheet analysis checks whether a company's resources, obligations, and equity support its operating plans. Start with a statement that balances, compare consistent dates, and then investigate liquidity, borrowing, and the largest account changes. A useful review ends with questions assigned to business owners, rather than a page of unexplained ratios.
The SEC's financial statements guide describes a balance sheet as financial position at a fixed point in time. Comparing those snapshots reveals movements; it does not, by itself, establish the transactions behind them.
Use statement exports for the same company scope, currency, and accounting basis. Retain account codes, reporting dates, balances, and current or noncurrent classifications. Obtain supporting receivables, inventory, borrowing, and equity schedules for material balances.
Map comparable accounts before calculating changes. Check whether an acquisition, an account reclassification, or a change in netting explains part of the movement. Compare equivalent points in the operating cycle when seasonality matters.
The balance sheet guide covers the statement's construction. Here the task is to read a completed statement and decide what requires investigation.
A US distributor compares December 31, 2025, with December 31, 2026. The table contains all its balances. Put account labels in column A, prior balances in B, current balances in C, and changes in D, using the row numbers shown.
| Row | Line | Prior balance (USD) | Current balance (USD) | Change (USD) |
|---|---|---|---|---|
| 2 | Cash | 180,000 | 120,000 | -60,000 |
| 3 | Receivables | 300,000 | 420,000 | 120,000 |
| 4 | Inventory | 320,000 | 400,000 | 80,000 |
| 5 | Current assets | 800,000 | 940,000 | 140,000 |
| 6 | Net equipment | 500,000 | 560,000 | 60,000 |
| 7 | Total assets | 1,300,000 | 1,500,000 | 200,000 |
| 8 | Accounts payable | 240,000 | 330,000 | 90,000 |
| 9 | Current borrowing | 80,000 | 150,000 | 70,000 |
| 10 | Current liabilities | 320,000 | 480,000 | 160,000 |
| 11 | Long-term borrowing | 280,000 | 320,000 | 40,000 |
| 12 | Equity | 700,000 | 700,000 | 0 |
| 13 | Liabilities plus equity | 1,300,000 | 1,500,000 | 200,000 |
Build the prior-period subtotals with these formulas, then copy them across into C:
B5: =SUM(B2:B4)
B7: =B5+B6
B10: =SUM(B8:B9)
B13: =SUM(B10:B12)
In D2 enter =C2-B2 and fill down through D13. Check both dates and the movement:
=B7-B13
=C7-C13
=D7-D13
All return zero. Do not sum a subtotal together with its component accounts. For an alternative statement layout, see the horizontal balance sheet; the underlying identity stays the same.
Working capital = Current assets − Current liabilities
Current ratio = Current assets / Current liabilities
Quick ratio, for this example = (Cash + Receivables) / Current liabilities
OpenStax's liquidity discussion explains the current ratio as coverage of current liabilities by current assets. The composition matters: inventory is included in the current ratio but excluded from this example's quick ratio. There are no marketable securities or other current assets here.
| Measure | Prior | Current | Prior-period formula; copy B references across to C |
|---|---|---|---|
| Working capital (USD) | 480,000 | 460,000 | =B5-B10 |
| Current ratio | 2.500 | 1.958 | =B5/B10 |
| Quick ratio | 1.500 | 1.125 | =(B2+B3)/B10 |
| Interest-bearing borrowing (USD) | 360,000 | 470,000 | =B9+B11 |
| Borrowing / equity | 0.514 | 0.671 | =(B9+B11)/B12 |
Ratios are rounded to three decimals; dollar calculations use the underlying balances. Borrowing here means the current and long-term borrowing rows, excluding accounts payable. Name that definition explicitly because other debt-to-equity calculations use broader liability measures.
Current assets grew, but current liabilities grew faster in dollars. Working capital falls from $480,000 to $460,000, and cash falls from $180,000 to $120,000. The business therefore has more assets without an improvement in these liquidity measures. The detailed working capital method explains the operating funding calculation separately.
Receivables rise by $120,000 and inventory by $80,000. Collections should explain the receivables increase using invoice aging, disputes, and sales timing. Operations should compare inventory growth with demand, purchasing decisions, and slow-moving items. Neither balance alone proves weaker performance: higher activity can also require more operating assets.
Payables increase by $90,000, while interest-bearing borrowing increases by $110,000: $70,000 current plus $40,000 long term. Treasury should confirm maturities, available cash, and whether the current portion reflects new borrowing or a maturity reclassification. Procurement and accounts payable should distinguish agreed supplier terms from overdue invoices.
The arithmetic ties: liabilities increase by $200,000 and equity is unchanged, matching the $200,000 increase in assets. Receivables, inventory, and equipment increase by $260,000 in total; offsetting the $200,000 financing-side increase leaves the $60,000 cash decline.
That is an accounting bridge, not a cash flow statement. Equipment movements can include depreciation and other noncash changes. Reconcile the causes with ledger movements and schedules using flux analysis. Use a common size balance sheet when the question is how the composition changed relative to total assets.
Bring the period-end statement exports and supporting schedules for the movements you need to explain. Covirage maps the columns, its tools compute and check the comparisons, and the external AI model explains the results with every figure traced to its rows. Create a free Covirage account and bring a sample of your own data.
See Covirage for finance teams for the reporting context.
First confirm the reporting dates, company scope, currency, and accounting basis, then check that assets equal liabilities plus equity. Ratios calculated from mismatched or incomplete statements can look precise while pointing to the wrong conclusion.
No. The ratio can improve because inventory or overdue receivables increased, even while usable cash fell. Review what makes up current assets, the expected collection dates, and the timing of obligations before concluding that liquidity improved.
Two balance sheets show which reported balances moved and provide an accounting reconciliation. They do not separate every cash and noncash transaction. Use the cash flow statement, ledger movements, and supporting schedules to establish the actual sources and uses of cash.