InvestorQ : How do we analyse from the balance sheet if the company is being run efficiently?
Dhwani Mehta made post

How do we analyse from the balance sheet if the company is being run efficiently?

Answer
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Anamika Sodhani answered.
1 year ago


Efficiency has two interpretations. Firstly, it is how effectively the physical assets like land, plant, machinery etc are being utilized. These are normally referred to as turnover ratios. There are broadly two aspects to the assets side of the balance sheet. Firstly, how are the capital expenses of the company being financed? If it is through operating cash flows then it is a healthy sign. However, if the operating cash flows are insufficient then the company needs to borrow from the market thereby increasing its financial risk. It is also important to see how frequently the assets are churned to generate sales. This can be looked at in terms of fixed assets or in terms of total assets. Higher the turnover ratio, the more efficiently the assets of a company are being churned to generated sales.

Another aspect is the productivity of labour and the employees or other aspects like space. For example, in case of banks the revenue per employee or the profits per employee are a key barometer of efficiency and productivity. Similarly, in case of retail outlets, the profit per square feet or the revenue per square feet is also a very important metrics for evaluation. This is the second angle of productivity or efficiency. The balance sheet is the real mirror of the wealth created by the company. The balance sheet is a quick measure of efficiency of the business while the income statement focuses more on the profitability of the business. A detailed analysis of the balance sheet offers interesting insights into the working of the company. In terms of the capital efficiency, the working funds efficiency and the asset efficiency, the balance sheet is perhaps the most important piece of information to look at.