Reading the Balance Sheet: A Company's Financial Health

The balance sheet answers one question: if everything stopped today, could the company pay what it owes?

Liquidity ratios

Measure a company’s ability to meet its short-term obligations.

Current Ratio:

Current Ratio = Current Assets ÷ Current Liabilities

Above 1 means current assets (cash, inventory, receivables) cover short-term liabilities.

Quick Ratio:

Quick Ratio = (Current Assets − Inventory) ÷ Current Liabilities

Stricter than the current ratio, since it strips out inventory (the hardest current asset to convert to cash quickly).

Leverage ratios

Measure how much a company relies on debt to finance itself.

Debt-to-Equity = Total Debt ÷ Total Equity

A high ratio means the company leans heavily on debt — not necessarily bad (some industries, like real estate, naturally run on high leverage), but it does raise risk, especially when interest rates rise or revenue declines.

A guideline, not an absolute law

These ratios are general guidelines, not fixed rules. A tech company and a steel manufacturer have completely different “healthy” benchmarks depending on their industry. The sharpest comparison is always: the same company over time, or against peers in the same industry.

Next up: the cash flow statement and earnings quality, plus a hands-on lab that analyzes all these ratios together.