Lesson 7 of 7 · All lessons in this module
- Measurement bases and intangible assets
- Goodwill: recognition, impairment and analysisVideo lesson
- Financial instruments: classification and measurementVideo lesson
- Non-current liabilities: long-term debt and deferred taxes
- Common-size balance sheets
- Liquidity and solvency ratios from the balance sheet
- Integrated cases: a balance sheet ratio set against an industry benchmark
Lesson 7 of 7 · 15 min
Integrated cases: a balance sheet ratio set against an industry benchmark
Balance sheet ratios are only informative against something: the same company a year earlier and an industry average; the skill is to map each line to the right ratio input, compute the set, and say which way each risk moved relative to both.
In short
- Map line items before calculating: the exhibit's own labels ("other financial assets", "short-term investments") may be what a ratio calls marketable securities.
- Common-size an industry column and a company column to compare structure; a company-versus-industry gap in goodwill or short-term debt is usually the story.
- Compute all seven ratios in both years, then give a direction for each, separately for liquidity (higher is safer) and solvency (higher is riskier).
- Liquidity and solvency risk can move opposite ways; the three liquidity ratios can also disagree with each other.
- Goodwill as a share of total assets screens for acquisition history and impairment exposure.
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