The balance sheet shows what a company owns versus what it owes at a single point in time. A healthy one has manageable debt and enough cash to survive a downturn without panicking.
The balance sheet is built on one identity that always holds: Assets = Liabilities + Equity. Assets are everything the company owns (cash, inventory, buildings, equipment). Liabilities are everything it owes (loans, bonds, unpaid bills). Equity is what's left over for shareholders — the difference between the two.
Both assets and liabilities split into current (due or usable within a year — cash, inventory, short-term debt) and non-current (longer-term — buildings, long-term debt). That split is the basis of the two ratios that matter most here: the current ratio (current assets ÷ current liabilities) measures short-term liquidity — can the company cover what it owes soon? The debt-to-equity ratio (total debt ÷ shareholder equity) measures leverage — how much of the business is funded by borrowing versus by owners' capital.
Neither ratio has one "correct" number — a capital-intensive business like a utility naturally carries more debt than a software company with few physical assets. The goal is spotting outliers: a current ratio well below 1 (can't cover near-term bills) or a debt-to-equity ratio far above the company's own history or its peers.
Notice the two sides always match: $250M of assets is funded by $125M of debt (short-term + long-term) and $125M of shareholder equity. This company's debt-to-equity ratio is $125M ÷ $125M = 1.0 — debt and equity fund the business equally, a reasonably balanced position, though the "right" number depends heavily on the industry.
Enter simplified balance sheet figures — see the current ratio and debt-to-equity ratio, and whether either looks stretched.
Model: Current Ratio = Current Assets ÷ Current Liabilities (below 1.0 flagged). Debt-to-Equity = Total Debt ÷ Shareholder Equity (above 2.0 flagged as worth extra scrutiny, though the "right" level varies a lot by industry).
Answer all five, then hit "Check My Answers" to see how you did. Get one wrong? No problem — the explanation will show you exactly why.
Print-friendly resources to revisit, practice, and dig deeper — no login required.
Now that you can judge what a company owns versus owes, the next step is following the actual cash moving through the business.