How do I interpret key figures from my balance sheet?
August 4, 2023 | 40,00 EUR | answered by Xenia Zellerbach
Dear tax consultant,
my name is Gertrud Meyer and I run a small business. Lately, I have been analyzing my balance sheet more closely and have come across various financial ratios whose meanings I do not fully understand. I would like to know how to interpret these ratios in order to better understand my company and potentially take measures to improve it.
My company has experienced steady growth in recent years, but I feel that profitability has not increased at the same rate. Although the equity ratio is solid, I wonder if it is sufficient for long-term success. Additionally, certain liquidity ratios concern me, as I am not sure how to evaluate them.
I am aware that interpreting financial ratios from the balance sheet is crucial for managing my company. Therefore, I would like to learn from you which ratios are particularly important and how to properly analyze them. Are there specific ratios I should pay special attention to? How can I determine from these ratios whether my company is well-positioned or if there is a need for action?
I look forward to your professional assessment and possible suggestions for solutions to better understand and successfully lead my balance sheet and thus my company.
Thank you in advance for your support.
Sincerely,
Gertrud Meyer
Dear Mrs. Meyer,
Thank you for your inquiry and your interest in analyzing your balance sheet ratios. It is very important to interpret the ratios correctly in order to better understand your company and take possible measures for improvement.
First of all, I would like to tell you that it is very positive that your company has shown consistent growth. This shows that you are on the right track. However, as you have already correctly identified, it is also important to keep an eye on profitability. Profitability reveals how efficiently your company generates profits. One way to calculate profitability is the profit margin, which is the ratio between profit and revenue. A decreasing profit margin could indicate that your costs are rising or your revenues are falling.
The equity ratio is another important indicator of the financial stability of your company. A solid equity ratio means that your company is less dependent on debt and therefore in a healthier financial position. However, it is difficult to say whether the equity ratio is sufficient to be successful in the long term, as this depends on various factors such as the industry in which you operate or your business model.
When it comes to liquidity ratios, it is important to keep an eye on the liquidity of your company, as a lack of liquidity can lead to payment difficulties. One ratio that provides information about liquidity is, for example, the liquidity reserve, which is the ratio between liquid assets and short-term liabilities. A low liquidity reserve could indicate that your company may have difficulty paying short-term liabilities.
There are many other ratios that are important for analyzing your balance sheet, such as return on equity, return on capital employed, or the working capital ratio. It is advisable to regularly analyze the key ratios in order to keep an eye on the financial situation of your company.
I hope that I have been able to help you with this information and am happy to answer any further questions you may have. We can also arrange a personal consultation appointment to analyze your balance sheet more thoroughly and discuss possible solutions.
Best regards,
Xenia Zellerbach
