Company analysisIntermediate

Balance sheet, debt and liquidity

The balance sheet is a snapshot of resources, obligations and equity. It allows us to know if a company can withstand a bad period without issuing shares or refinancing under unfavorable conditions.

3 min read Practical guide

By the end

You will evaluate liquidity, maturities and asset quality, not just total debt.

Assets that matter

Cash and equivalents are more liquid than inventory, and inventory is more verifiable than goodwill. Examines customer receivables, inventory age, and intangible assets. An accounting asset cannot always be converted into cash at its carrying value.

Liabilities and maturities

Separate suppliers, debt, leases, taxes and commitments. Net debt summarizes, but hides when it is due and how much it costs. A long-term solvent company may suffer if it concentrates payments next year.

Example

Debt 500 and cash 300 seems like net debt 200. If 450 matures in six months and part of the cash is restricted, the real risk is greater.

Ratios with context

Current ratio and quick ratio help in businesses with working capital, but they do not replace the collection and payment cycle. For debt, compare interest to EBIT or FCF and debt to normalized earnings, not a cyclical peak.

resistance test

Reduces sales, margin and access to financing in an adverse scenario. Calculate minimum cash, interest and maturities. Read notes and covenants: the risk is usually in conditions, guarantees and obligations outside the main owner.

Box available and restricted.

Expiration calendar.

Fixed or variable rate.

Interest coverage.

Covenants and leases.

From data to a decision

Can it survive the downside case?

This guide cannot predict the next move on its own. It can build a conditional reading: what supports upside, what increases downside risk, and which evidence must appear before acting.

Favourable reading

Cash, maturities, and coverage allow it to withstand a temporary downturn.

Adverse reading

Near-term maturities and covenants depend on a perfect recovery.

Required confirmation

Project cash after interest, capex, and maturities for 24 months.

Reasoned example

Debt of 500 is very different with FCF of 250 and five-year maturity than with FCF of 20 and near-term maturity.

Applied workshop

Turn the explanation into a process

Follow these steps in order and keep the result, so you can repeat the analysis and identify what changed your decision.

1Classify available, restricted and operationally required cash.
2Order debt and leases by maturity, rate, currency, security and covenant.
3Compare upcoming payments with cash, committed facilities and stressed cash flow.
4Include pensions, litigation, guarantees and liabilities outside the headline balance sheet.

Review questions

Can it survive two bad years without issuing equity?
Which maturity concentrates risk?
Would higher rates break coverage?

Worked case

Small net debt, large maturity

Cash 300 and debt 500 look like net debt 200. However, 400 is due this year, 100 cash is restricted, and the adverse FCF is 50. Refinancing is necessary even though the aggregate ratio seems comfortable.

Build a timeline and try older types. Read notes on covenants, guarantees and leases because the total debt holder does not show conditions.

Decision rule

The question is not only how much you owe, but when you pay, with what cash and under what conditions.

Put it into practice

Draw a timeline of debt maturities and compare it with cash and conservative FCF for the next three years.