Mastering Financial Accounting: Balance Sheet Components and Key Ratios

Balance Sheet Components and Structure

Assets Classification

• Non-current Assets (Intangibles)

  Definition: Industrial Property, APIs, Development Costs.

• Non-current Assets (Tangibles/Equipment)

  Definition: Buildings, Furniture, Machinery, Real Estate Investments.

• Current Assets (Inventory)

  Definition: Goods (Stocks).

• Current Assets (Receivables)

  Definition: Customers, Financial Investments, Trade Receivables, Debtors, Public Administration Debtors.

• Current Assets (Available Cash)

  Definition: Banks (Cash).

Equity and Liabilities

• Equity (Net Assets)

  Definition: Capital, Reserves, Income, Profits.

• Non-current Liabilities

  Definition: Suppliers of Non-current Assets, Bills Payable, Debts to Credit Institutions (Long-Term).

• Current Liabilities

  Definition: Suppliers, Commercial Payables, Debt to Credit Institutions (Short-Term), Public Administration Creditors, Social Security Creditors.

Analyzing Financial Stability: Equity Scenarios

Understanding the company's financial health based on its balance sheet structure:

• Normal Financial Stability

  Current assets are funded by net working capital (Positive Working Capital).

• Long-Term Financial Imbalance

  Indicates solvency problems.

• Insolvency

  Negative working capital, leading to potential bankruptcy proceedings.

• Bankruptcy

  Severe financial distress resulting in the loss of business continuity.

Key Financial Ratios for Business Analysis

Liquidity and Solvency Ratios

• Cash Ratio (Acid Test II)

  (Available + Realizable) / Current Liabilities (Target: Near 1)

• Liquidity Ratio (Current Ratio)

  Current Assets / Current Liabilities (Target: 1.0 - 2.0)

• Solvency Ratio (Total Guarantee)

  Total Assets / Total Liabilities (Target: 1.0 - 2.0)

• Cash Availability Ratio

  Available Cash / Current Liabilities (Target: 0.3 - 0.4)

Debt and Autonomy Ratios

• Financial Autonomy Ratio

  Equity / Total Liabilities (Target: 0.8 - 1.5)

• Short-Term Debt Ratio

  Current Liabilities / Total Liabilities (Target: Low)

Financial Imbalances

Indicators of potential issues:

• Excess Liquidity
• Cash Deficit
• Solvency Surplus
• Solvency Deficit

Cash Flow and Comprehensive Analysis Types

Defining Cash Flow

Cash flow is an essential indicator used in financial business management.

• Financial Cash Flow: The difference between receipts and payments.
• Economic Cash Flow: The sum of profits and depreciation (a proxy for operating cash flow).

Types of Financial Analysis

• Asset Analysis

  Study the structure and composition of assets, liabilities, and the relationships between these balance sheet components.

• Financial Analysis

  Study the solvency and liquidity of the company's investments and financial structure.

• Economic Analysis

  Study the company's Profit and Loss account results to assess profitability, productivity, and future expectations. Key areas include Financial Balance, Equity, and Economic Performance.

Working Capital (Fondo de Maniobra)

• Positive Working Capital: Indicates sufficient operating margin and liquidity within the company.
• Negative Working Capital: Signals problems paying short-term debts and proximity to bankruptcy.