A Basic Introduction to Balance Sheet and Solvency Analyses
21 Pages Posted: 21 Feb 2014 Last revised: 6 Oct 2014
Date Written: February 20, 2014
Balance sheets are often seen as technical, boring financial statements. Understanding the working of a balance sheet is, however, key to understanding how companies are financed. This article first of all provides a basic introduction to the working of a balance sheet. It explains how the concepts of Balance Sheet Total, Equity and Solvency Ratio relate to each other. It also provides an introduction to the working of leveraged finance and explains its, sometimes fatal, attraction. It also explains how the risks of overleveraged finance are externalized from shareholders and secured professional creditors to unsophisticated trade creditors that often do not know how to read a balance sheet.
Keywords: Equity, Debt, Solvency Ratio, Leverage Ratio, Insolvency
JEL Classification: K12
Suggested Citation: Suggested Citation