How do you analyze a company's balance sheet and the composition of its assets and liabilities?

If inventory growth far outpaces revenue growth, it indicates that the company’s products are not selling well. A continuous rise in inventory turnover days suggests that capital is tied up in inventory. Here, inventory metrics can be analyzed in conjunction with accounts receivable: if both are increasing rapidly, it may signal that the company is struggling both to sell its products and to collect payments—a warning sign of deteriorating operations. 4. Fixed Assets and Construction-in-Progress Fixed assets refer to assets held for producing goods, providing services, leasing, or operational management—assets of relatively high value with useful lives exceeding one year. They constitute the material foundation for a company’s production and operations. Construction-in-progress represents projects still under development and serves as the precursor to fixed assets; upon completion, such projects are reclassified as fixed assets. Construction-in-progress thus provides insight into a company’s capacity expansion plans. 5. Depreciation, Amortization, and Impairment Let me briefly explain depreciation, amortization, and impairment—though recorded on the income statement, they are closely linked to the balance sheet. Depreciation generally applies to fixed assets, while amortization applies to intangible assets. Since fixed assets wear out or eventually become obsolete through use, and intangible assets lose value over time, accounting standards require companies to systematically allocate their costs via depreciation and amortization. This allocated amount does not represent actual cash outflow, yet it is charged against earnings—explaining why many companies’ net operating cash flow exceeds net profit. Additionally, goodwill, inventory, and accounts receivable all face potential value erosion—for example, inventory liquidated at steep discounts or uncollectible receivables—requiring impairment provisions. Such provisions likewise reduce current-period net profit without affecting cash flow. The balance sheet comprises current liabilities and non-current liabilities, representing money owed by the company. Of particular importance are interest-bearing debt and operating trade payables. 6. Short-Term and Long-Term Borrowings Among interest-bearing debts, short-term and long-term borrowings are especially significant—they essentially reflect funds borrowed from banks. If the sum of short-term and long-term borrowings becomes excessively high, pushing total interest-bearing debt to elevated levels, the company will bear heavy annual finance costs. Attention should also be paid to the maturity mix between short- and long-term borrowings: long-term borrowing typically carries lower interest rates than short-term borrowing. A rapid increase in short-term borrowings may indicate acute near-term liquidity shortages requiring urgent funding—raising red flags about potential cash-flow disruptions. 7. Accounts Payable, Advances from Customers, and Contract Liabilities Accounts payable, advances from customers, and contract liabilities represent amounts owed to suppliers or customers—reflecting the company’s ability to interest-free fund operations using supplier or customer credit. If (accounts payable + advances from customers) minus (accounts receivable + prepaid expenses) is positive, the company is effectively occupying external funds; if negative, it is pre-funding operations—revealing its relative bargaining power across the industrial chain. 8. Debt-to-Asset Ratio and Interest-Bearing Debt Ratio From the balance sheet, we can calculate the company’s debt-to-asset ratio and interest-bearing debt ratio—measuring total debt and interest-bearing debt as percentages of total assets—to gauge financial leverage. High-leverage industries—such as banking and real estate development—often exhibit debt-to-asset ratios above 80%. Medium-leverage industries—including manufacturing and aviation—typically range between 40% and 70%. Low-leverage industries—such as consumer goods, pharmaceuticals, and software development—usually maintain debt-to-asset ratios below 20%.

How do you analyze a company’s long-term solvency?

A decade-long industry practitioner chimes in unsolicited! Have you ever wondered why some seemingly thriving businesses suddenly plunge into crisis? Often, when people first receive financial statements, they examine isolated indicators and scattered data points—yet remain unable to answer critical questions: Why does a company appear profitable but carry massive debt? Why are fewer and fewer partners willing to collaborate with it? Without coherent answers, how can data truly guide business decisions or risk control? In fact, the root cause lies in solvency—the very cornerstone of financial health—which directly determines a company’s creditworthiness and survival threshold. Today, Old Li takes this opportunity to discuss what solvency is, how to analyze it, and how to use data to identify risks. I. What Exactly Is Solvency Analysis? Simply put, solvency refers to a company’s ability to repay its maturing debts fully and on time—a direct reflection of its credit foundation. Companies with strong solvency enjoy greater initiative in financing and commercial partnerships. I consistently emphasize that solvency analysis must be layered—it primarily consists of two dimensions: 1. Short-term solvency: Focuses on whether the company can repay debts due within one year—testing asset liquidity and speed of conversion into cash. 2. Long-term solvency: Focuses on whether the company’s overall debt burden is reasonable and whether it can sustain operations over the long term—testing capital structure and the sustainability of profitability. Once these two dimensions are clarified, we can scrutinize financial statements with clear objectives. II. What Are the Key Metrics? Now, let’s move into core practical analysis. We extract data from the company’s balance sheet and income statement to unpack these critical metrics. (A) Short-Term Solvency Metrics These metrics focus on the “current assets” and “current liabilities” items on the balance sheet. 1. Current Ratio Formula: Current Ratio = Current Assets ÷ Current Liabilities It measures how many times current assets cover current liabilities—i.e., the degree of protection available for meeting short-term obligations. Traditionally, a ratio around 2 is considered sound. A ratio below 1 signals negative working capital and high short-term repayment risk. 2. Quick Ratio Formula: Quick Ratio = (Current Assets − Inventory − Prepayments) ÷ Current Liabilities You might wonder: Why exclude inventory? Because inventory is the least liquid—and most impairment-prone—component among current assets. By excluding it, the quick ratio focuses only on highly liquid assets like cash and accounts receivable, offering a more rigorous assessment of immediate solvency. Typically, a quick ratio around 1 represents an ideal “safety cushion.” How should these figures be interpreted? I recommend building a visual dashboard using analytical tools—for instance, I’ve built a solvency analysis dashboard here using FineBI. Aren’t these data instantly intuitive? Breaking down each module clarifies everything. I’ve shared this solvency analysis template—simply adjust parameters to apply it directly. Feel free to download it. Having covered short-term solvency, let’s now take a longer-term view. (B) Long-Term Solvency Metrics These metrics assess the company’s financial structure and the extent to which earnings cover debt obligations.

Long-Term Debt to Total Assets Ratio of Gevo, Inc.

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Gevo, Inc. financial data page displays its long-term debt to total assets ratio on TradingView, offering an overview of the company's financial standing.

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Long-Term Debt to Total Assets Ratio of AdvanSix Inc.

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