A Basic Introduction to Balance Sheet and Solvency Analyses

21 Pages Posted: 21 Feb 2014 Last revised: 6 Oct 2014

See all articles by Roelf Jakob de Weijs

Roelf Jakob de Weijs

University of Amsterdam - Centre for the Study of European Contract Law (CSECL)

Date Written: February 20, 2014

Abstract

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

de Weijs, Roelf Jakob, A Basic Introduction to Balance Sheet and Solvency Analyses (February 20, 2014). Amsterdam Law School Research Paper No. 2014-14; Centre for the Study of European Contract Law Working Paper Series No. 2014-02. Available at SSRN: https://ssrn.com/abstract=2398922 or http://dx.doi.org/10.2139/ssrn.2398922

Roelf Jakob De Weijs (Contact Author)

University of Amsterdam - Centre for the Study of European Contract Law (CSECL) ( email )

P.O. Box 1030
Amsterdam, 1000 BA
Netherlands

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