Imagine this: You are sitting at your bank to discuss a new loan or an investment. The advisor briefly leafs through your documents and asks about your equity ratio, liquidity ratio and coverage ratio 2. You hesitate - after all, business is going well, the order situation is stable and profits look good. But it soon becomes clear that simply looking at the profit and loss account is not enough to assess the economic situation of a company. This is where key figures from the balance sheet come into play. They are like an X-ray image of the finances, because they not only show what is visible to the outside world, but also the structures, strengths and weaknesses that are hidden behind the figures.
In this article, we take a detailed look at the most important balance sheet ratiosexplain what types there are, how they are calculated and how you can correctly interpret their significance. We also use practical examples to show how these ratios are used in company analysis and why they are not only indispensable for banks and investors, but also for your own company management.
What are balance sheet ratios?
Balance sheet ratios are key business figures that are derived directly from a company's balance sheet. They provide a compact but meaningful overview of a company's financial structure, stability and solvency. While the profit and loss account (P&L) primarily shows the economic success over a certain period of time, balance sheet ratios provide an overview of the financial structure, stability and solvency of a company. balance sheet ratios provide a snapshot as at the balance sheet date - a snapshot of the financial situation, so to speak.
They not only serve as a guide for management, but are also a key tool for external interest groups such as banks, investors and rating agencies. They use such key figures to quickly assess how solidly a company is positioned, whether it can service its debts and whether it is financially flexible enough to react to changes in the market.
However, their benefits go far beyond mere creditworthiness checks. Financial ratios help to identify risks at an early stage, make well-founded investment decisions and put your own strategy on a solid financial footing. When interpreted correctly, they provide information on how liquid a company is, how high the proportion of equity or debt capital is and how efficiently existing assets are being used.
Differentiation from performance indicators
While balance sheet ratios are derived exclusively from the balance sheet, performance ratios are derived from the income statement and show how profitable a company has been over a certain period of time.
The decisive difference therefore lies in the observation period and the focus:
- Key balance sheet figures → Snapshot of the financial structure as at the reporting date
- Key performance indicators → Time-related presentation of income, expenses and earnings
For example, net profit is a performance indicator that shows how much profit was generated in a year. The equity ratio, on the other hand, is a balance sheet figure that shows how high the share of equity is in the total assets - regardless of how high the profit or loss was in the current year.
In practice, both types of key figures are often analyzed together. Only the combination of profitability (income statement) and financial structure (balance sheet) provides a holistic picture of the economic situation. For example, a company can be profitable but have a weak equity base, which makes it vulnerable to crises. Conversely, a solid capital structure can provide stability even in the event of short-term losses.
Interpretation and significance of balance sheet ratios
Balance sheet indicators are not just columns of figures. They are tools for assessing the financial situation of a company from different perspectives. It is only through their interpretation that it becomes clear whether a company is stable, capable of growth or financially risky.
For example, a high equity ratio signals independence from lenders and a solid basis for investments. Conversely, a very high debt ratio can indicate a strong dependence on banks, which can lead to problems in times of crisis.
Asset intensity shows the extent to which capital is tied up in non-current assets. While capital-intensive sectors such as industry naturally have higher values here, this can be a warning signal for service companies.
The following applies to liquidity ratios: they provide information on how quickly a company can meet its short-term payment obligations. A low liquidity ratio of 1 does not automatically mean insolvency, but shows that there are few cash reserves.
Working capital is also a key indicator. A permanently negative working capital can indicate structural liquidity problems, even if the income statement shows positive figures.
The analysis becomes particularly meaningful when several key figures are considered in combination. A company with a low equity ratio, high debt ratio and low liquidity ratio could be in trouble in the short term, even if it is currently profitable. Conversely, a company with solid liquidity reserves and a high equity ratio can remain stable even in difficult market phases.
Vertical and horizontal balance sheet ratios
Financial stability indicators can be roughly divided into two groups: vertical and horizontal. This distinction is based on how the individual items of the balance sheet are related to each other.
Vertical balance sheet ratios compare items within a balance sheet page with each other. A capital or asset item is usually related to the balance sheet total. Examples
- Equity ratio = equity / balance sheet total × 100
- Debt ratio = debt capital / balance sheet total × 100
- Asset intensity = Fixed assets / total assets × 100
- Working capital intensity = current assets / total assets × 100
These key figures help to assess how stable a company's financing is and what its asset structure looks like. A high equity ratio, for example, is an indicator of independence from lenders and a solid credit rating.
Horizontal balance sheet ratios on the other hand, relate items on the assets and liabilities side to each other. They answer the question of whether certain parts of the assets are secured in the long term or financed in the short term. Typical examples:
- Coverage ratio 1 = equity / fixed assets × 100
- Coverage ratio 2 = (equity + non-current liabilities) / fixed assets × 100
- Liquidity ratios (1, 2 and 3), in which short-term available funds are set in relation to short-term liabilities.
Horizontal key figures are often associated with the so-called "golden balance sheet rule": long-term assets (e.g. buildings, machinery) should also be financed on a long-term basis in order to avoid liquidity bottlenecks. liquidity bottlenecks to avoid liquidity bottlenecks.
Key vertical balance sheet figures in detail
Vertical balance sheet ratios provide a quick overview of the structure of capital and assets. They are expressed as a percentage and provide information on the stability, risk and flexibility of a company.
Vertical balance sheet ratios (structural ratios)
- Equity ratio
Formula Equity ÷ total capital × 100
Shows how high the share of equity is in total financing. A higher ratio means greater financial stability and less dependence on borrowed capital. - Debt ratio
Formula Debt capital ÷ total capital × 100
Measures the proportion of debt capital in financing. A high ratio indicates greater indebtedness. - Debt-equity ratio
Formula: Debt capital ÷ equity × 100
Ratio between debt and equity. The lower the ratio, the more independent the company is. - Asset intensity
Formula: Fixed assets ÷ total assets × 100
Shows how heavily a company is invested in non-current assets. High values often mean less flexibility. - Circulation intensity
Formula: Current assets ÷ total assets × 100
Indicates the proportion of assets that can be turned over in the short term. High values indicate greater scope for liquidity. - Asset coverage ratio I
Formula: Equity ÷ fixed assets × 100
Shows whether fixed assets are covered by equity alone. Reference value: close to 100 %. - Asset coverage ratio II
Formula: (equity + non-current liabilities) ÷ fixed assets × 100
Measures whether long-term investments are covered by long-term capital (golden balance sheet rule). Reference value: ≥ 100 %.
Horizontal balance sheet ratios (liquidity & coverage ratios)
- Liquidity ratio 1 (cash liquidity)
Formula: Cash and cash equivalents ÷ current liabilities × 100
Shows what proportion of current liabilities can be settled immediately. Guide value: 20-30 %. - Liquidity ratio 2 (collection-related Cash position)
Formula: (cash and cash equivalents + receivables) ÷ current liabilities × 100
Also includes current receivables. Guideline value: at least 100 %. - Liquidity ratio 3 (sales-related Cash position)
Formula: Current assets ÷ current liabilities × 100
Includes all assets that can be liquidated in the short term. Reference value: 200 %. - Working capital
Formula: Current assets - current liabilities
Shows the financial buffer for ongoing operations. A positive value is usually a sign of stability. - Dynamic gearing ratio
Formula: Debt capital ÷ cash flow
Indicates how many years it would take to pay off all debts from the operating cash flow. The lower, the better.
Working capital - the working capital of a company
Working capital is an indicator of a company's short-term financial strength. It is calculated from the difference between current assets and current liabilities:
Formula:
Working capital = current assets - current liabilities
A positive value means that the company is able to cover its short-term obligations with funds available at short notice and also has a buffer. Negative working capital, on the other hand, can indicate liquidity problems, but does not necessarily have to be bad, for example if a company works with very short storage times and fast incoming payments and therefore hardly needs to tie up any funds.
Working capital is particularly important for assessing the scope for investment and the ability to process payments at short notice. It therefore complements the liquidity ratios and provides investors and company management with a clear overview of short-term stability.
Typical industry benchmarks for balance sheet sizes
The informative value of key figures from the balance sheet depends heavily on the sector. A value that is considered healthy in one sector may already be classified as critical in another. It is therefore important to evaluate key figures not in isolation, but in a sector comparison.
Equity ratio
- Industry & Production25-40 % are considered solid.
- Tradeoften somewhat lower, 20-30 %, as inventories and current assets dominate.
- Services30-50 %, as less capital is tied up in investments.
Debt ratio
- Values above 70 % are risky in most sectors, unless stable cash flows are guaranteed. cash flows secure the servicing of debt.
- Infrastructure or real estate companies often work with higher ratios, as long-term financing is common.
Asset intensity
- Capital-intensive sectors such as mechanical engineering or energy: often over 60 %.
- Service sector: often below 30 %.
A high value ties up capital in the long term, but reduces flexibility.
Liquidity levels
- Liquidity ratio 1 (cash liquidity): 10-30% is considered healthy, as cash should not be lying around unused.
- Liquidity ratio 2 (quick ratio): 100 % and more are optimal for covering short-term obligations.
- Liquidity ratio 3 (current ratio): Values around 150-200% indicate a solid liquidity position.
Working capital
- Positive working capital is desirable in most industries.
- In retail, slightly negative working capital can occur if goods are sold quickly and suppliers are paid late - this is not necessarily critical as long as cash flow remains stable.
These guide values only serve as orientation. It is crucial to compare them with historical data from your own company and with direct competitors. This makes it clear whether deviations are due to industry-specific structures, strategic decisions or actual risks.
The most common mistakes when analyzing balance sheet ratios
Such financial indicators are a powerful tool for assessing the financial stability and performance of a company - but only if they are interpreted correctly. In practice, there are a number of pitfalls that can lead to incorrect conclusions.
- Isolated consideration of individual key figures
A single key figure rarely tells the whole truth. For example, a high equity ratio may look good, but at the same time the company may suffer from a weak cash position. Cash position suffer from a weak cash position. Only the combination of several key figures provides a realistic overall picture. - Lack of industry comparison
Values can hardly be classified without an industry context. An asset intensity of 70 % may be normal in mechanical engineering, but a warning signal in the service sector. - No consideration of trends
A one-off look at the figures is like a photo - it only shows the moment. It is more meaningful to take a look over several years in order to recognize developments and trends. A continuous decline in liquidity ratios, for example, can indicate creeping payment problems. - Underestimating the influence of balance sheet policy
Companies can use their balance sheet structure to "improve" key figures. For example, receivables can be collected shortly before the balance sheet date or payments can be postponed in order to improve liquidity ratios. - Do not separate balance sheet and income statement
Some key figures look solid until they are combined with the results of the income statement. Positive working capital is of little help if the operating cash flow is permanently negative. - Incorrect interpretation of seasonal effects
Stocks, receivables and payables fluctuate greatly depending on the season, particularly in the retail and agricultural sectors. Those who do not take these effects into account quickly misinterpret the key figures.
The key to a meaningful analysis is therefore to look at the values in combination, analyze them over time and always include the context of the industry and company situation.
Conclusion: Balance sheet ratios as a navigation tool
Balance sheet-based key figures are far more than just dry calculation values - they are a company's navigation system. Those who calculate them regularly, interpret them correctly and place them in the context of the industry and corporate strategy will recognize opportunities and risks at an early stage. It is crucial not only to look at individual values, but also to understand the interplay of all relevant key figures. This turns figures into clear impulses for action for sustainable economic success. success.
FAQs
- What are balance sheet ratios and what are they used for?
Balance sheet ratios are mathematical values that are derived from the balance sheet and other company data. They help to assess the financial situation, Cash position, capital structure and profitability of a company and to track developments over time. - Which balance sheet ratios are the most important?
The most important include the equity ratio, debt ratio, asset intensity, current ratio, liquidity ratios 1-3, coverage ratios and working capital. Which key figures are relevant in each individual case depends heavily on the industry and the analysis objective. - How often should key balance sheet figures be calculated?
At least once a year as part of the annual financial statements - but preferably quarterly or monthly in order to identify trends at an early stage and be able to take corrective action. Modern controlling and accounting tools such as COMMITLY even enable a daily evaluation.
