Balance Sheet in Financial Analysis

The main purpose of the balance sheet statement is to report a company’s financial position on a particular date. 

Uses

Balance sheet is an important statement in financial analysis and has many uses:

  • The balance sheet provides a clear assessment of the resources available with a company to generate future cash flows.
  • The balance sheet also provides information about the liquidity position of the firm, that is, its ability to meet its short-term obligations.
  • The balance sheet also provides information about the long-term solvency of the company.

Limitations

The balance sheet also has a few limitations:

  • By looking at the balance sheet an analyst cannot determine the market value of the firm, nor can he find its liquidation value. This is because many assets such as land and building are recorded at historical costs rather than market value.
  • The balance sheet does not record many important intangible items such as employee skills, knowledge, management experience, and reputation.

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