Balance Sheet Analysis

Structured approach to analyzing a company's balance sheet based on the App Economy Insights methodology.

Analysis Workflow

1. Gather the Data

Obtain balance sheet data:

• Quarterly (10-Q) or Annual (10-K) filings

• Multiple periods for trend analysis (minimum 4 quarters or 2-3 years)

• Competitor data for benchmarking

• Income statement data for profitability ratios (ROA, ROE)

2. Analyze Assets

Evaluate asset composition:

• Current vs Non-current: Asset liquidity profile

• Cash position: Strength and trend

• Receivables: Collection efficiency (watch for growth outpacing revenue)

• Inventory: Turnover and obsolescence risk

• Goodwill: Acquisition dependency (warning if >25% of total assets)

3. Analyze Liabilities

Evaluate debt structure:

• Current vs Long-term: Maturity profile

• Short-term debt: Refinancing risk

• Long-term debt: Can it be paid off in 3-4 years of earnings? (Buffett test)

• Deferred revenue: Positive signal for recurring business

4. Assess Shareholders' Equity

Evaluate ownership value:

• Retained earnings: Positive and growing?

• Treasury stock: Share buyback activity

• Equity trend: Building or eroding over time?

5. Calculate Key Ratios

Current Ratio = Current Assets / Current Liabilities Quick Ratio = (Cash + ST Investments + A/R) / Current Liabilities Debt-to-Equity = Total Liabilities / Total Equity ROA = Net Income / Total Assets ROE = Net Income / Shareholders' Equity

For complete formulas and benchmarks: See references/metrics-formulas.md

6. Evaluate Financial Health

Assess four key traits:

• Liquidity: Can short-term obligations be met? (Current ratio > 1.0)

• Solvency: Can long-term debts be serviced? (Interest coverage > 3.0)

• Efficiency: Are assets being used productively? (Asset turnover)

• Profitability: Are assets generating returns? (ROA, ROE)

7. Compare and Benchmark

Perform comparative analysis:

• Trend Analysis: Track changes over multiple periods

• Peer Comparison: Benchmark against competitors

• Common-Size Analysis: Express items as % of total assets

• DuPont Analysis: Decompose ROE into margin, turnover, leverage

For complete checklist: See references/analysis-framework.md

Output Structure

Present analysis as:

• Asset Quality: Composition, liquidity, and efficiency

• Liability Assessment: Debt levels, maturity, and risk

• Equity Position: Retained earnings, capital structure

• Liquidity Analysis: Current ratio, quick ratio with trends

• Solvency Analysis: Debt-to-equity, interest coverage

• Profitability: ROA, ROE, DuPont decomposition

• Red Flags: Any concerns identified

• Summary: Overall financial health assessment

Critical Context

Balance sheets cannot be analyzed in a vacuum. Connect findings to:

• Income Statement: For profitability ratios and interest coverage

• Cash Flow Statement: For actual cash generation vs balance sheet changes