balance-sheet-analysis

name	balance-sheet-analysis
description	Analyze balance sheets to assess company financial health, liquidity, and solvency. Use when evaluating assets, liabilities, shareholders' equity, debt levels, working capital, or financial position. Triggers on balance sheet analysis, liquidity assessment, solvency evaluation, debt analysis, ROA/ROE calculation, current ratio, debt-to-equity, or financial position review.

Balance Sheet Analysis

Structured approach to analyzing a company's balance sheet based on the App Economy Insights methodology.

Analysis Workflow

1. Gather the Data

Obtain balance sheet data:

• Quarterly (10-Q) or Annual (10-K) filings
• Multiple periods for trend analysis (minimum 4 quarters or 2-3 years)
• Competitor data for benchmarking
• Income statement data for profitability ratios (ROA, ROE)

2. Analyze Assets

Evaluate asset composition:

• Current vs Non-current: Asset liquidity profile
• Cash position: Strength and trend
• Receivables: Collection efficiency (watch for growth outpacing revenue)
• Inventory: Turnover and obsolescence risk
• Goodwill: Acquisition dependency (warning if >25% of total assets)

3. Analyze Liabilities

Evaluate debt structure:

• Current vs Long-term: Maturity profile
• Short-term debt: Refinancing risk
• Long-term debt: Can it be paid off in 3-4 years of earnings? (Buffett test)
• Deferred revenue: Positive signal for recurring business

4. Assess Shareholders' Equity

Evaluate ownership value:

• Retained earnings: Positive and growing?
• Treasury stock: Share buyback activity
• Equity trend: Building or eroding over time?

5. Calculate Key Ratios

Current Ratio = Current Assets / Current Liabilities
Quick Ratio = (Cash + ST Investments + A/R) / Current Liabilities
Debt-to-Equity = Total Liabilities / Total Equity
ROA = Net Income / Total Assets
ROE = Net Income / Shareholders' Equity

For complete formulas and benchmarks: See references/metrics-formulas.md

6. Evaluate Financial Health

Assess four key traits:

• Liquidity: Can short-term obligations be met? (Current ratio > 1.0)
• Solvency: Can long-term debts be serviced? (Interest coverage > 3.0)
• Efficiency: Are assets being used productively? (Asset turnover)
• Profitability: Are assets generating returns? (ROA, ROE)

7. Compare and Benchmark

Perform comparative analysis:

• Trend Analysis: Track changes over multiple periods
• Peer Comparison: Benchmark against competitors
• Common-Size Analysis: Express items as % of total assets
• DuPont Analysis: Decompose ROE into margin, turnover, leverage

For complete checklist: See references/analysis-framework.md

Output Structure

Present analysis as:

1. Asset Quality: Composition, liquidity, and efficiency
2. Liability Assessment: Debt levels, maturity, and risk
3. Equity Position: Retained earnings, capital structure
4. Liquidity Analysis: Current ratio, quick ratio with trends
5. Solvency Analysis: Debt-to-equity, interest coverage
6. Profitability: ROA, ROE, DuPont decomposition
7. Red Flags: Any concerns identified
8. Summary: Overall financial health assessment

Critical Context

Balance sheets cannot be analyzed in a vacuum. Connect findings to:

• Income Statement: For profitability ratios and interest coverage
• Cash Flow Statement: For actual cash generation vs balance sheet changes