Balance Sheet Ratios

When measuring the financial health of a business, Balance Sheet ratios sit closer to be lagging indicators than P&L ratios. This is because they reflect the consequences of operational decisions — how revenue is collected, how inventory is managed, how the business is financed — rather than the decisions themselves These ratios are a standard part of financial analysis in any capital-intensive or credit-sensitive business. In many cases, the most scrutinized ratios are the liquidity ones ( Current and Quick Ratio) because lenders and counterparties use them to assess default risk before extending credit or trade terms. If you're monitoring balance sheet ratios in your business, anchor your working capital assumptions (Days Sales Outstanding, Days Inventory Outstanding, and Days Payable Outstanding) to actual collections and payment data rather than contract terms. Also track Return On Assets and Return On Equity together: a rising ROE driven by leverage rather than improving ROA is a warning sign, not a win.