How do I interpret the figures from my balance sheet?
May 26, 2024 | 40,00 EUR | answered by Christiane Fuchs
Dear tax consultant,
My name is Sophia Werner and I run a small family business in the trade sector. In the last balance sheet, I have identified various key figures such as equity ratio, liquidity ratios, and profitability indicators. However, I find it difficult to interpret these figures correctly and derive concrete recommendations for action from them.
The current state of my company shows an equity ratio of 30%, a liquidity ratio of 1.2, and a total capital return of 5%. I am concerned whether these values are sufficient for my company to be successful in the long term. Additionally, I am wondering what measures I could take to improve the key figures and stabilize the financial situation of my company.
Could you please explain to me how to correctly interpret the individual key figures from my balance sheet and what conclusions I should draw from them? Are there specific recommendations for action that you can provide to help improve the financial health of my company? I am grateful for any advice and support to continue to successfully run my business.
Thank you in advance for your help.
Best regards,
Sophia Werner
Dear Mrs. Werner,
Thank you for your inquiry and for trusting in my expertise as a tax consultant. The key figures from your balance sheet that you mentioned are indeed important indicators of the financial health of your company. Let me first explain how you can correctly interpret these key figures and what conclusions should be drawn from them.
The equity ratio provides information on the proportion of equity to total capital. A ratio of 30% means that 30% of the capital in the company comes from equity, while the remaining 70% is financed by debt. A high equity ratio is usually positive, as it indicates a solid financial structure and makes the company less dependent on external sources of financing.
A liquidity ratio of 1.2 indicates that your company has sufficient short-term liquidity to cover its current liabilities. A value above 1.0 indicates that your short-term liabilities are covered by liquid assets. A higher value would of course be even better, as it indicates greater financial security.
The overall capital return of 5% shows how efficiently your company manages the capital deployed and how profitable it operates. A value of 5% means that you achieve a return of 5% on the total capital employed. The higher the profitability, the better for your company.
To derive specific recommendations for action to improve the financial health of your company, it may be useful to analyze the individual key figures more closely and examine where exactly there is room for improvement. Possible measures could include:
1. Increase in equity: Consider how you can increase your equity, for example through shareholder contributions or converting profits into equity.
2. Improving liquidity: Optimize your cash flows, review your inventory and receivables, and try to increase your liquidity reserves.
3. Increase profitability: Analyze your cost structures, check if your prices are appropriate, and look for ways to increase your revenues.
It is important to tailor these measures individually to your company and possibly also supplement them with other key figures and information from your management. I am happy to offer you a personal consultation to develop a tailored strategy together for stabilizing your financial situation.
I hope this information is helpful to you and look forward to being able to support you in your endeavors.
Best regards,
Christiane Fuchs
