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Kurtis Hanni - Balance Sheet Overview

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Oscar Purnama
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56 views11 pages

Kurtis Hanni - Balance Sheet Overview

Uploaded by

Oscar Purnama
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Balance Sheet

Overview
Kurtis Hanni
@KurtisHanni
The Balance Sheet is the most valuable Financial
Statement, yet most businesses ignore them.

Here is what the Balance Sheet teaches you and


how to analyze it:

Kurtis Hanni
@KurtisHanni
The Balance Sheet formula is:
Assets = Liabilities + Equity

Rework that formula and you get


Assets - Liabilities = Equity

What you own - what you owe = book value of the


business.

In this way, it’s answering the question, is this


business healthy?

A book value < 0 = Accounting Insolvency


But Accounting Insolvency is just a book number;
you might still be able to meet your obligations with
cash flows.

Good? No… but not cash flow insolvency, where you


can’t meet your short or long-term obligations.

Kurtis Hanni
@KurtisHanni
The Balance Sheet is broken into 3 sections:

• Assets: what you own


• Liabilities: what you owe
• Equity: the difference

Both Assets & Liabilities are further broken down


into short-term (less than year) or long-term (more
than year hold or maturity).

Kurtis Hanni
@KurtisHanni
The Equity section is broken into these components:

• Common stock (initial capital investment)


• Owner’s contributions
• Owner’s distributions
• Retained earnings
• Current Year Net Income

Current Year Net Income from the Income


Statement shows up in the equity section as you see.

Every year, that balance is zeroed out and rolled in


Retained Earnings, which is a reflection of historical
earnings of the business.

Kurtis Hanni
@KurtisHanni
To analyze this statement, you’re going to do
two types of analysis:

• Horizontal Analysis
• Ratio Analysis

Horizontal Analysis is looking at the change


between a past period and the current period.

That can be past month, quarter, or year.

With Ratio Analysis, you’ll look for benchmarks


as well as trends.

Some common types of ratios are:

• Liquidity Ratios
• Solvency Ratios
• Return on Ratios

Kurtis Hanni
@KurtisHanni
Liquidity Ratios
These ratios measure your ability to turn assets
into cash.

Some favorites are:

• Current Ratio or Quick Ratio


• Cash Burn Rate / Cash Runway
• Cash Conversion Cycle

Kurtis Hanni
@KurtisHanni
Solvency Ratios
These ratios show your ability to pay-off debts.
Some common ones are:

• Debt-to-equity Ratio
• Interest Coverage Ratio
• Debt Service Coverage Ratio

Kurtis Hanni
@KurtisHanni
Return-on Ratios
These tell you what your return on investment is.
Trying to use your assets efficiently? Use Return
on Assets (ROA)

Looking to measure financial efficiency compared


to competitors? Return on Equity (ROE)

Wonder how efficiently you’ve deployed investor


capital? Return on Invested Capital (ROIC)
Want to understand how well current capital is
utilized (especially in capital-intensive industries)?
Return on Capital Employed (ROCE)

Kurtis Hanni
@KurtisHanni
You should NEVER use all of these ratios.

Choose the specific analysis tools that are best for


your business and watch:
• trends
• thresholds

When a trend turns bad or a threshold number is


broken, dive deeper and determine why.

Kurtis Hanni
@KurtisHanni
Over the next few days we'll go over the
Statement of Cash Flows and go deeper into
analyzing your Financials.

SMB
Financial
Fundamentals

If you’re a business owner and want to be able to


use your financials as a decision-making tool,
check out my cohort (it starts March 11th)

Kurtis Hanni
@KurtisHanni

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