Interview Your Investments: Balance Sheet Financial Ratios

Written by: Alexandra (she/her)

2 min read | Published: October 13, 2026

A person sits at a desk using a calculator with several documents, a laptop and an office plant nearby

After reading a balance sheet and understanding key terminology, there are numerous financial ratios that can be calculated to indicate the health of a company’s profitability, liquidity, solvency and efficiency.

Profitability

Profitability refers to a company’s ability to produce profit with effective use of its resources, and it's used to assess how efficiently a company operates within its industry. Two common ratios that reflect a company’s profitability are return on assets and return on equity. For these ratios, information from a company’s income statement will also be needed.

Return on assets (ROA): This is calculated by dividing the income statement’s net income by the balance sheet’s average total assets.
Return on equity (ROE): This is determined by dividing the net income over the average shareholders’ equity listed.

For these ratios, higher returns typically indicate a healthier, more profitable business.

Liquidity

Liquidity refers to how easily a company’s assets can be converted to cash without losing value, and it's used to assess a company’s ability to fulfill short-term debt obligations. Two ratios that reflect a company’s liquidity include the current ratio and the quick ratio.

Current ratio: Calculated by dividing current assets by current liabilities.
Quick ratio: Measured by adding all cash, marketable securities and accounts receivable. Then, that value is divided by the current liabilities.

For these ratios, higher values typically suggest there is adequate liquidity in the business to cover current liabilities.

Solvency

Solvency refers to a company’s ability to fulfill long-term debt obligations, and it's used to assess a company’s long-term financial stability. As solvency ratios differ across fields, it's crucial to compare values with industry benchmarks. Two common ratios that reflect a company’s solvency include the debt-to-equity ratio and the debt-to-assets ratio.

Debt-to-equity ratio: This is calculated by dividing total liabilities over total shareholders’ equity listed.
Debt-to-assets ratio: This is found by dividing total liabilities by total assets.

For these ratios, lower values typically signal a business is healthy enough to meet long-term debt requirements.

Efficiency

Efficiency refers to a company’s ability to maximize performance while minimizing expenses. The ratios that reflect a company’s efficiency include asset turnover ratio, inventory turnover ratio and receivable turnover ratio. For these calculations, information reflected on a company’s income statement is needed.

Asset turnover ratio: This is calculated by dividing the income statement’s revenue over the balance sheet’s average total assets.
Inventory turnover ratio: This is measured by dividing the income statement’s cost of goods sold over the balance sheet’s average inventory.
Receivables turnover ratio: This is evaluated by dividing the income statement’s revenue over the balance sheet’s average accounts receivable.

For these ratios, higher turnover values indicate a company is efficiently utilizing its assets to produce income.

With these calculations, investors may further build their own understanding of the company’s overall health. Using key financial ratios as an important component of their overall review of a company, they can better determine the risk of their potential investments.