ECONOMÍA DE MINERALES

BALANCE SHEET
Asieh Hekmat
Session 6
Reference: Rick J. Makoujy, Jr., (2010) “How to Read a Balance Sheet”, McGraw-Hill Companies
What is Balance sheet
The balance sheet shows what a company’s assets are (what it owns), what its liabilities
are (what it owes), and what its equity is (what’s left over) at a specific point in time.

ASSETS = LIABILITIES + EQUITY

The balance sheet, also called the statement of financial position, is the expanded
expression of the accounting equation.
 Principal components of a balance sheet
Another way to state the equation:
Uses of resources = Sources of resources

Liabilities and owners' equity are the sources

from which the firm has obtained its funds.

The listing of assets shows the way that the firm's

managers have put those funds to work.

The balance sheet is the cumulative result of the firm's past activities.
Principal components of a balance sheet
 Assets are things a company owns and are sometimes referred to as the resources of
the company. Simply stated, assets represent value of ownership that can be converted
into cash (although cash itself is also considered an asset). Current assets include
inventory, while fixed assets include such items as buildings and equipment.

 Liabilities are obligations of the company; they are amounts owed to creditors for a past
transaction and they usually have the word "payable" in their account title. Liabilities also
include amounts received in advance for future services.

 Owners' equity is the residual interest in the assets of an entity after deducting liabilities.
 Assets
Assets are simply things a company owns. A company might own cash, equipment,
trademarks, real estate, IOUs from customers, pending tax refunds, inventory, or
marketable securities.

Assets are generally broken into two categories:

 short-term (or current) assets

 Long-term assets.

Companies don’t own people (their employees), but it might feel that way sometimes!
CURRENT ASSETS
Current assets are those things a company owns that are expected to be turned into (or
used as) cash within one year from the date they’re listed on the balance sheet.
Examples of current, or short-term, assets include cash, short-term investments, IOUs
from customers (accounts receivable), prepaid expenses, and inventory.

 However, care should be taken to include only the qualifying assets that are capable
of being liquidated at the fair price over the next one year period.
CURRENT ASSETS
 Cash and Short-Term Investments
Cash, quite simply, is the amount of money on hand, plus the balances in all checking and savings
accounts. Deposited cash often generates a small amount of interest, which is a source of non-
operating income.

Short-term investments include loans of less than one year, as opposed to Treasury notes or bonds,
which aren’t due for at least a year. Other short-term investments such as certificates of deposit (CDs)
and funds deposited in money market accounts are also lumped into this category. Short-term
investments are included with cash because they are considered to be very safe and are liquid enough
to be readily converted into cash, should the need arise.

At the end of the day, cash is king. The goal of every business is to create value for its owners. Value
is often viewed as a company’s ability to generate cash.
CURRENT ASSETS
 Accounts Receivable
When a company ships an order, it is customary in many businesses to extend to that customer
payment terms. Fifteen, thirty, or even ninety days may be granted to pay the invoice that accompanies
the goods or services provided. From the period when the sale is recorded (which is generally when the
transaction is completed and the corresponding invoice is generated and sent to the customer), until the
point at which the funds are received, the company is owed money in the form of an IOU (Investor
Owned Utilities) from the customer. Customer IOUs, which are quite common in most businesses that
don’t require payment in full upfront, are called “accounts receivable.” Having accounts receivable
equaling one month of sales (about 30 days) might be a reasonable level in many types of businesses.

Accounts receivable assets, to the extent that they are current (and not past due), are often used as
collateral for short-term loans, as they are likely to provide a business with cash in a month or two from
the date listed on their balance sheet.
CURRENT ASSETS
 Accounts Receivable
Not all businesses extend payment terms to customers. Restaurants, for example, generally
require you to pay for a meal before leaving the premises. For restaurants that accept credit
cards, payment might be withheld for a day or two by the credit card companies. For this short
time period, the business would own a credit card receivable asset until it is converted into cash.

Other business types, such as a patio installation company, may actually require customers to
front money prior to any work being performed. This customer deposit (sometimes called deferred
revenue), as opposed to an account receivable, is actually a company’s short-term liability
because work is required to earn the money that has already been received.
CURRENT ASSETS
 Prepaid expenses
Prepaid expenses reflect cash that has already been paid for items that have yet to be
delivered. For example, if a business were to pay $1,000 monthly rent for six months in
advance, it would have an asset equal to $6,000 on its balance sheet. Provided that it made
no additional payments, its prepaid rent current asset would decline to $5,000 one month
later (as its prepaid asset would now cover only five months). The $1,000 of value “used up”
in that first month would be expensed on the income statement, even though no cash was
spent at the time the value was purged. At the beginning of the six-month period, there is
value to this cashless asset. After the six months is up, no residual value remains.
CURRENT ASSETS
 Inventory
Inventory is the merchandise that a company purchases or makes to sell to customers for a
profit. This could be anything from pencils to cars to houses. It depends on the business. For
example, a car dealership is in the business of reselling cars. Thus, their cars are considered
inventory.

Obviously, each business pays less for the inventory than it hopes to receive from customers in
the future in order to generate a gross profit.

Not all businesses require inventory, though. For example, a consultant may be paid for advice
and does not need to carry goods to be sold. But many retail establishments, including
restaurants, landscape nurseries, electronics stores, and lemonade stands, must use cash in
advance to have items available for sale later.
NONCURRENT ASSETS
Noncurrent, or long-term, assets are those things
a company owns that are not expected to be
converted into or used as cash within one year.
Noncurrent assets are generally utilized in the
operation of a business. Examples include
equipment, furniture and fixtures, real estate,
patents, trademarks, and long-term investments.
NONCURRENT ASSETS
 Equipment

Types of equipment will vary from one business to the next. A construction company may have
cranes, dump trucks, and bulldozers. A warehouse might utilize forklifts. A newspaper business
requires large printing presses. Each of them probably has copiers, computers, and some furniture.

In all of these cases, however, equipment is utilized to facilitate operations to make them more
efficient. Cars and trucks are often deemed a form of equipment—imagine the loss of productivity a
business would suffer without them! In general, equipment may be viewed as an efficiency-enhancing
tool that provides operational benefits to a business for years. These long-term assets are critical
components to keeping companies competitive. As you might imagine, different types of equipment
have varying productive, or useful, life spans.
NONCURRENT ASSETS
 Real Estate and Related Improvements
Companies often own the land and buildings in which they do business and may own
other real estate as an investment as well. These long-term assets generally hold their value
for many years. Owning the occupied real estate eliminates the need to pay rent and avoids
a landlord’s lease renewal demands but subjects the company to pay real estate taxes as
well as associated insurance costs.

The purchase of real estate is not deemed to be an immediate loss of value and is
therefore not expensed at the time of acquisition—it is a transfer of one asset, cash, to
another, the land and building. Similarly, the cash paid for improvements to the real estate,
such as a new roof, an addition, a new electrical system, or aluminum siding are not
immediate expenses.

Real estate and improvements are listed on the balance sheet at their original cost. Much
like the purchase of equipment, these cash outlays produce lasting benefits. For this reason,
the loss of value of real estate and related improvements occurs gradually.
NONCURRENT ASSETS
 Investments
Companies, like individuals, seek to utilize their resources in an efficient manner. If assets
are available, management is evaluated on how well it is able to generate a return on the
pool of resources it has to invest.

Smart managers will constantly survey market opportunities and will consider seeking
ownership of equity in other companies, debt obligations that provide a steady return,
commodities that may be useful as a business hedge (like an airline committing to long-term
fuel supply contracts), or currency hedging transactions (which may also be beneficial for
businesses that derive sales from countries that utilize denominations other than their own).
NONCURRENT ASSETS
 Intangible Assets
Intangible assets, quite simply,
are things a company owns that you
can’t touch or feel. Intellectual
property, such as patents,
trademarks, and copyrights, are
prime examples of intangible assets.
LIABILITIES
Liabilities are simply monies that a company owes. A business might owe money to the Internal
Revenue Service in the form of taxes, to employees in the form of accrued payroll, to vendors in the
form of accounts payable, or to banks for credit cards, mortgages, and other loans.

Liabilities show how much cash will be needed (beyond weekly operating
expenses) to pay obligations that come due within the next year (current
liabilities) and beyond (long-term liabilities).
CURRENT LIABILITIES
Recall that current assets are expected to be used as or converted into cash within one year.
Similarly, current liabilities are those obligations, which the company must pay within 12 months
from the date of the balance sheet on which the current liabilities are shown.

Examples of current liabilities are accounts payable, accrued expenses, customer deposits,
and that portion of long-term debt’s principal that is due within a year.

Accounts payable are IOUs effectively issued by a company

when it receives goods or services from vendors. These short-
term obligations may include an electric bill or an invoice for
goods received that has not yet been paid.
CURRENT LIABILITIES
 Accrued Expenses
These obligations generally grow, or accrue, over time without a corresponding invoice detailing
the debt.
For example, employees in a business might have the benefit of four paid weeks of vacation
each year. If and when each employee leaves the company, he or she is entitled to be paid for
unused vacation time. To accurately reflect that the company owes this money, an expense is
recorded above cash payroll expenses each period in which the vacation time is not taken.
Another example of an accrued expense would be payroll. If a balance sheet were to be dated
at the end of the day on a particular Wednesday, and the employees receive paychecks every
Friday, the balance sheet must reflect the liability for three days (Monday through Wednesday) of
accrued payroll liability, even though she hasn’t received an invoice reflecting such obligation.
Another type of current liability is customer deposits.
CURRENT LIABILITIES
 Short-Term Portion of Long-Term Obligations
■ Most long-term debt loans have a fixed monthly payment for a
specified number of months, the cost of borrowing the money, and the
repayment of the loan.
■ For example, imagine that you borrow money to buy an equipment.
The equipment loan might be a five-year obligation, the portion of
principal that must be repaid in the next year is a short-term liability,
and the remainder still is a long-term liability
LONG-TERM LIABILITIES
Just like long-term assets, which are not expected to be converted into or used as
cash within one year from their posting on a balance sheet, long-term liabilities are not
required to be paid for at least one year.

Examples of long-term liabilities include real estate

mortgages, equipment loans, bonds, or bank debt. Of course,
some or all of these obligations might be due in the
upcoming 12 months, depending on their maturity dates and
whether or not some of the principal might be required to be
paid in the short run.
LONG-TERM LIABILITIES
 MORTGAGE LIABILITIES
A mortgage is a type of debt that must be repaid within a certain time period, typically for
real estate purchases.
 Note and Bond Liabilities
Bonds and notes payable are two types of debt that companies can access to raise
capital. Technically speaking, both are written agreements between the company and the
lender defining how much will be borrowed, when and how it will be repaid, and how much
interest will be paid and when.

Bonds and notes both appear on the liabilities side of a company's balance sheet, and the
interest paid on each appears as an interest expense on the income statement. In financial
terms, bonds and notes are mostly indistinguishable.
EQUITY
 Equity is simply the difference

between assets and liabilities.

 Equity is also called “net worth.” It

represents the value that the

owners have in the business.

If one were to sell all of a company’s assets for their book value and use the proceeds to pay
off all of its liabilities, what would be left over for the owners?

NET WORTH or EQUITY: the value the owners have in the company.
Components of Stockholders Equity
Share capital
Share capital (shareholders’ capital, equity capital, contributed capital or paid-in capital) is the
amount invested by a company’s shareholders for use in the business.

Share capital is a major line item but is sometimes broken out by firms into the different types of
equity issued. This can represent common stock and preferred stock, the latter including the par
value of the stock.

Share capital is separate from other equity generated by the business. As the name “paid-in
capital” dictates, this equity account refers only to the amount “paid-in” by investors and
shareholders.
Components of Stockholders Equity
 Retained Earnings

A company’s common equity benefits from two sources of funds. The first, paid-in
capital, is infused by owners into the company outside of the business operations. The
other, retained earnings, is the sum of all net income held from the company’s
inception. In short, these are profits that are kept in the company. If a firm loses money
over an income statement’s time frame, retained earnings on the balance sheet will
decline by the amount of the losses. Similarly, paid-in capital on the balance sheet
decreases by the amount of any dividends paid to owners over the same span.
 Anglo America has listed the following information in the
finance statement on 31 December 2018. Classify the
information in a balance sheet and calculate Equity.

Account $1000 Account $1000

Intangible assets 3087 Inventories 4466
Short term borrowings 600 Environmental rehabilitation trusts 303
Derivative financial assets 132 Medium and long term borrowings 8371
Current tax liabilities 581 Property, plant and equipment 30898
Financial asset investments 396 Cash and cash equivalents 6567
Trade and other payables 4734 Retirement benefit obligations 609
Deferred tax liabilities 3676 Derivative financial liabilities 613
Current tax assets 121 Trade and other receivables 2026
Assets June 30,2009 Dec. 31, 2008
Current Assets:
Cash and cash equivalents $ 202,565 $ 180,578
Accounts receivable, net 6,617,105 5,821,593
Weighted average number of
Inventories, net 10,169,120 10,540,769 shares and equivalent shares of
Other current assets 1,365,456 1,181, 097 common stock outstanding:
Total current assets 18,354,337 17,688,037 Basic: 2,775,902

Property, plant and equipment, net 10,125,682 10,575,982

Last Trade: 2.58
Other assets 1,698,968 1,724,172 Prev. close: 2.5789
Bid: 2.46*100
Total Assets $ 30,178,987 $ 29,988,191 Ask: 2.58*500
1ye target est: 2.60
Liabilities &Equity 52 week range: 1.2 – 2.84
Total current liabilities $ 16,299,152 $ 16,222180 Average volume: 3,290,16
Market cap: 7.06M
Long term debt, less current maturities 5,469,538 6,018,655
Stockholders' equity 8,369,044 7,734,600
Non-controlling interest 14,253 12,756
Total liabilities and Equity $ 30,178,987 $ 29,988,191
Stock trading activities
Liabilities:
$ 16,299,152
Assets: +
Weighted average number of shares:
$ 5,469,538
2,775,902
$30,178,986
Equity:
$ 8,369,044
8369044
Book value per share = = 3.014
2775902

If we really believe the numbers of the balance sheet, we think the fair price for
each share is 3.014. Looking at the finance table of the company tells us that
the last trade was 2.58.
Why are balance sheets important?
It's clear that balance sheets are critical documents because they keep business owners like
you informed about your company's financial standing.

Many business owners fail to recognize their companies are in trouble until it's too late. This is
because some business owners aren't examining their balance sheets. Typically, if the ratio of
your business's assets to liabilities is less than 1 to 1, your company is in danger of going
bankrupt, and you'll have to make some strategic moves to improve its financial health.

Balance sheets are also important because these documents let banks know if your business
qualifies for additional loans or credit. Balance sheets help current and potential investors better
understand where their funding will go and what they can expect to receive in the future.
Analyzing a Balance Sheet
The 4 important Finance ratios that we can define from a balance sheet are:
 Liquidity ratio
Tells how well a company can pay off its short term debts and meet unexpected
needs for cash.
 Profitability ratio
Tell how much of each dollar of sales, assets, and owner`s investment resulted in
net profit.
 Leverage ratio
Show how and to what degree a company has financed its assets
 Efficiency ratio
Indicate how effectively a company uses its resources to generate sales.
What is liquidity?
Liquidity is the capacity of a business to find the resources needed to meet its obligations in the
short-term.

For such reason, the liquidity on the Balance Sheet is measured by the presence of Current
Assets in excess of Current Liabilities or the relationship between current assets and current
liabilities.

The main liquidity ratios are:

• Current ratio
• Quick Ratio (Acid or Liquid Test)
• Absolute Ratio
 liquidity
 Current ratio
This ratio shows the relationship between the company’s current assets over its current
liabilities. It measures the short-term capability of a business to repay for its obligations:

𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒓𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

 Example: If a business has:

Cash = $15 million Marketable securities = $20 million Inventory = $25 million
Short-term Debt = $15 million Accounts Payables = $15 million Current Ratio=?

A rate of more than 1 suggests financial well-being for the company. There is no upper-end on what is “too much”, as this can
be very dependent on the industry, however, a very high current ratio may indicate that a company is leaving excess cash
unused rather than investing in growing its business.
 liquidity
 Quick Ratio (Acid or Liquid Test)
Current Assets are those converted in cash within one accounting cycle. Therefore, while
the current ratio tells us if an organization has enough resources to pay for its obligations within
one year or so, the Quick ratio or acid test is a more effective way to measure liquidity in the very
short-term. Indeed, the quick ratio formula is:

𝑳𝒊𝒒𝒖𝒊𝒅 𝑨𝒔𝒔𝒆𝒕𝒔
𝑸𝒖𝒊𝒄𝒌 𝑹𝒂𝒕𝒊𝒐 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔

Liquid assets are defined as Current Assets – (inventory + Pre-paid expenses).

Although inventory and pre-paid expenses are current assets, they are not always turned into cash
as quickly as anyone would think.

Although, a quick ratio of over 1, can generally be accepted, while below one is usually seen as undesirable since you will not be able
to pay very short-term obligations unless part of the inventory is sold and converted into cash.
liquidity
 Absolute Ratio
This is the third current ratio, less commonly used compared to current and quick ratio. If the
quick ratio is more stringent in comparison to the current ratio, the absolute ratio is the strictest
of the three. This is given by:

𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑎𝑠𝑠𝑒𝑡
𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Liquid assets – Accounts receivable = Absolute Assets.

Generally, cash on hand and marketable securities are part of the absolute assets. The
purpose of the absolute ratio is to determine the liquidity of the business in the very short-term
(few days).
What is profitability?
Profitability is the ability of any business to produce “earnings.” The Financial Statement,
which tells us whether a company is making profits or not is the Income Statement (or Profit
and Loss Statement).

The main profitability ratios used in financial accounting are:

– Gross profit margin

– Operating profit margin

– Return on capital employed (ROCE)

– Return on equity (ROE)

Profitability
 Return on capital employed (ROCE)
This measure assesses whether the company is profitable enough, considering the capital
invested in the business.

Indeed, it tells for each dollar invested in the business, how much return is generated.

The ROCE is the relationship between Operating Profit, and Capital Employed, expressed in
percentage terms.

𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑝𝑟𝑜𝑓𝑖𝑡
𝑅𝑂𝐶𝐸 = × 100
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑

Capital Employed = Total Assets – Current Liabilities

Profitability
Return on capital employed (ROCE)

Example: Imagine, company XYZ operating profit for Year-Two is $100K, and the capital
invested in the business (your total assets – current liabilities) is $500K.

100𝐾
𝑅𝑂𝐶𝐸 = × 100 = 20%
500𝐾

Therefore, for every dollar invested in the business the company made 20 cents. The higher
the ROCE, the better it is for its stakeholders. Consequently, an increasing ROCE overtime is
a good sign.
Profitability
 Return on Equity (ROE)
This is the relationship between net income and shareholder equity or, the amount of revenue
generated by the shareholder’s investment in the organization. This is one of the most used ratios
in finance.

𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐸 = × 100
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠 𝐸𝑞𝑢𝑖𝑡𝑦

Example: Imagine the net income of Company XYZ in Year-Two was $20K and you invested
$100K. Therefore the ROE is (20/100) x 100% = 20%.

It means that the shareholders are getting rewarded overtime for their risky investment. This
leads to more future investments by other shareholders and the appreciation of the stock.
What is leverage ratios
The leverage ratios also called solvency ratios is used to help to assess the short and long-term
capability of an organization to meet its obligations. In fact, while the liquidity ratios help us to
evaluate in the very short-term the health of a business, the leverage ratios have a broader
spectrum.

Be reminded that the assets can be acquired either through debt or equity. The relationship
between debt and equity tells us the capital structure of an organization.

When, the debt grows (and interest expenses grow exponentially) too much, this can be a real
problem. Consequently, the Leverage Ratios help us to answer questions such as: Is the company
using an optimal capital structure? If not, is debt or equity the problem? If the debt is the
problem, will the company be able to repay for its contracted debt through its earnings?
leverage ratios

The main Leverage ratios are:

 Debt to equity ratio

 Interest Coverage Ratio

 Debt to Assets ratio

leverage ratios
 Debt to equity ratio
This ratio explains how much more significant is the debt in comparison to equity. This ratio can be
expressed either as number or percentage. The formula to compute the debt to equity ratio is:

𝑇𝑜𝑡𝑎𝑙 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑟𝑎𝑡𝑖𝑜 =
𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟`𝑠 𝑒𝑞𝑢𝑖𝑡𝑦

The debt to equity ratio measures the level of risk of an organization. Indeed, too much debt
generates high-interest payments that slowly erode the earnings.

When things go right, and the market is favorable, companies can afford to have a higher level of
leverage. However, when economic scenarios change such companies find them in financial
distress. Indeed, as soon as the revenues slow down, they are not able to repay for their scheduled
interest payments. Therefore, those companies will have to restructure their debt or face bankruptcy
leverage ratios
 Interest Coverage Ratio
The interest coverage tells us if the earnings generated are enough to cover for the interest
expenses. The interest coverage formula is:

𝐸𝐵𝐼𝑇
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒 𝑟𝑎𝑡𝑖𝑜 =
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒

The EBIT (earnings before interest and taxes) has to be large enough to cover for the interest
expense. A low ratio means that the company has too much debt and earnings are not enough to
pay for its interest expense.

A high ratio means instead the company is safe. Keep in mind that being too safe can be
limiting as well. In fact, an organization that is not able to leverage on debt may miss many
opportunities or become the target of larger corporations.
leverage ratios
 Interest Coverage Ratio
Example: Imagine that your coffee shop at the end of the year generated $10K in net income. The Interest
expense is $120K and taxes $20K. How do we compute the interest coverage ratio?

1. EBIAT or earnings before interest after tax is 10 + 120 = 130.

2. Take the EBIAT and add back the tax expense. Therefore you will get the EBIT. The EBIT is 130 + 20 = 150.

3. The interest coverage ratio is: 150: 120 = 1.25 times.

This implies that the EBIT is 1.25 times the interest expense. Therefore the company generates just enough
operating earnings to cover for its interest. However, it is very close to the critical level of 1. Below one the
company is risky. Indeed, it may be short of liquidity and close to bankruptcy anytime soon.
leverage ratios
 Debt to Assets Ratio
This ratio explains how much debt was used in acquiring the company’s assets and it is
expressed either in number or percentage. The formula is:

𝑻𝒐𝒕𝒂𝒍 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑫𝒆𝒃𝒕 𝒕𝒐 𝑨𝒔𝒔𝒆𝒕 𝑹𝒂𝒕𝒊𝒐 =
𝑻𝒐𝒕𝒂𝒍 𝒂𝒔𝒔𝒆𝒕𝒔

Example: Imagine your coffee shop shows on the balance sheet $200K of total liabilities and $50K of equity.
How do we compute the debt to asset ratio?
1. Compute the total assets: $200K of liabilities + $50K of equity = $250K.
2. Compute the debt to asset ratio: $200 of liabilities / $250 of total assets = 0.8.
This means that 80% of the company’s assets have been financed through debt. A ratio lower than 0.5 or 50%
indicates a fair level of risk. A ratio higher than 0.5 or 50% can determine a higher risk of the business. Of
course, this ratio needs to be assessed against the ratio from comparable companies.