Balance Sheet - Comparative Analysis

• 3 methods - [1] horizontal analysis [2] vertical analysis [3] ratio analysis
• Horizontal Balance Sheet Analysis
• Compare company's performance over a period of time.
• Ask the following questions:-
• Has inventory increased \ deceased?
• If increased, is it due to higher anticipated sales or unanticipated reduce sales (resulting in a stockpile)?
• Has account receivable increased?
• If increased, is it due to increase sales? Are customers taking longer to pay?
• Has company increase its long term debt?
• If increased, is it due to anticipateh growth or to fund current obligations it is unable to pay?
• These questions can help to determine if a comapny is growing or struggling.
• Vertical Balance Sheet Analysis
• Show the balance sheet items in terms of percentage of total assets.
• Compares financial strength of two different companies of differetn size. (common size balance sheet)
• Ask the following questions:-
• What proportion of total assets are in liquid form (i.e. in short-term assets)? 
• indicates which company has more flexibility in paying its obligations.
• How much inventory does the company keep on hand?
• indicates which company might have more efficient operations for turning over its inventory.
• What is the proportion of total long-term debt to total assets? 
• indicate which company is more heavily indebted.
• Ratio Analysis
• Current Ratio 
• measures the "solvency" or liquidity of the company - the ability to pay current liabilities with current assets.
• Current Ratio = Current Assets / Current Liabilities
• The higher the current ratio, the greater is the company's ability to pay its short-term obligations
• if < 1.0, the company might find it difficult to repay all its current liabilities.
• Quick Ratio
• measure of liquidity, it removes less liquid assets from the current ratio equation. 
• more challenging, since it only accounts for a portion of the current assets.
• Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
• The higher the quick ratio, the greater is the company's ability to pay its short-term debt obligations 
• if > 1.0, the company might find it difficult to repay all its current liabilities.
• Leverage Ratio
• it gives the investor a good indication of the company's leverage.  
• Leverage Ratio = Total Debts/ Net Worth (or Total Equity)
• it can vary by industry, a rule of thumb - the ratio should be no higher than 2:1.  
• if ratio >  2:1, the company may have trouble paying creditors & obtaining additional long-term funding. 

References:-

• Comparative Balance Sheet Analysis By Sara Huter, eHow Contributor