3 important balance sheet ratios
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The balance sheet of a company holds a lot of useful information. You can even calculate some very important ratios using the metrics in the balance sheet.
3 Important Balance Sheet Ratios Here’s a quick look at 3 important balance sheet ratios. First, we have the current ratio. This ratio is calculated by dividing the current assets by the current liabilities. It shows the company’s ability to pay back its short-term liabilities. Next, let’s look at the debt equity ratio. This ratio is calculated by dividing the total liabilities by the shareholders equity. It reflects the ability of the shareholders’ equity to cover all the outstanding debts in the case of a decline in the business. Lastly, let’s look at the debt-to-assets ratio. It is the ratio of the total debt to the total assets. This number shows the degree to which a company has used its debts to finance its assets. These ratios, combined with P&L ratios, help you with fundamental analysis. The cash flow statement that a company prepares is also important We’ll learn more about this statement in the coming chapter.