What Is Asset & Liability Analysis of Stocks

Evaluating a company's assets and liabilities is key to understanding its financial health. This analysis reveals how it manages debt, funds operations, and builds resources—helping investors assess its long-term potential.

Assets represent everything a company owns or controls that can generate economic value.

Assets are broadly categorised into:

Current Assets

These are short-term resources expected to be converted into cash or used up within a year. Examples include:

• Cash and cash equivalents
  

• Accounts receivable
  

• Inventory
  

• Short-term investments

Non-Current Assets

Also known as fixed or long-term assets, these are expected to provide value over multiple years. Examples include:

• Property, plant, and equipment (PPE)
  

• Intangible assets (like patents and goodwill)
  

• Long-term investments
  

Understanding asset composition helps investors gauge how efficiently a company is using its resources to generate revenue.

Liabilities are the financial obligations a company owes to external parties.

They are classified into:

Current Liabilities

These are liabilities that a company is expected to pay off within 12 months, such as:

• Accounts payable
  

• Short-term loans
  

• Outstanding expenses
  

• Tax liabilities

Non-Current Liabilities

These are long-term obligations, usually extending beyond one year. Examples include:

• Long-term loans or bonds payable
  

• Lease obligations
  

• Deferred tax liabilities
  

A company with manageable liabilities relative to its assets is generally considered financially healthier.

Asset and liability analysis helps assess a company’s liquidity, solvency, and capital structure, all of which are vital for long-term sustainability.

Key reasons why this analysis is important:

• Understand if the company can meet short-term obligations
  

• Evaluate debt levels relative to equity
  

• Assess how well the company is using its assets to generate profits
  

• Spot red flags such as excessive borrowing or poor asset quality

Here are some commonly used financial ratios that help investors assess asset and liability health:

1. Current Ratio

Purpose: Measures a company’s ability to cover short-term obligations with its current assets.
Formula:

• Current Ratio = Current Assets / Current Liabilities

Interpretation:
A ratio above 1 indicates good short-term financial health.

2. Debt-to-Equity Ratio

Purpose: Shows how much of the company is financed by debt versus shareholders' equity.
Formula:

• Debt-to-Equity Ratio = Total Liabilities / Shareholders’ Equity

Interpretation:
Lower values are typically safer, but capital-heavy industries may operate with higher ratios.

3. Asset Turnover Ratio

Purpose: Assesses how efficiently the company uses its assets to generate revenue.
Formula:

• Asset Turnover Ratio = Net Sales / Average Total Assets

Interpretation:
A higher ratio indicates better efficiency in asset utilization.

4. Quick Ratio (Acid-Test Ratio)

Purpose: Evaluates liquidity by excluding inventory from current assets.
Formula:

• Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Interpretation:
Offers a more conservative view of liquidity than the current ratio, focusing on near-cash assets.

Investors can analyse the asset-liability structure by reviewing the company’s balance sheet in its quarterly or annual financial statements.

Steps to follow:

Step 1: Download the balance sheet from credible sources such as the stock exchange or the company’s website.

Step 2: Identify and classify assets and liabilities as current (due within a year) or non-current (long-term).

Step 3: Calculate key ratios like:

• Current Ratio = Current Assets / Current Liabilities
  

• Debt-to-Equity = Total Liabilities / Shareholder’s Equity
  

Step 4: Compare with past years to identify trends in asset growth or rising debt.

Step 5: Benchmark against peers in the same sector to spot strengths or red flags.

This analysis gives investors a grounded view of how stable or risky a company may be.

• Rising current assets: Could point to growth, but may also suggest idle cash or inventory build-up.
  

• Growth in non-current assets: Often indicates expansion, such as new factories or technology.
  

• High intangible assets: May require scrutiny if not supported by strong earnings.

• Increasing current liabilities: Might suggest cash flow problems or rising short-term debt.
  

• High long-term liabilities: Could indicate heavy reliance on loans for growth.
  

• Sudden debt increase: Requires careful review of why the company is borrowing and whether returns justify the risk.

Some signs that may indicate financial distress or poor management include:

• Current ratio below 1 for multiple periods
  

• Sharp rise in borrowings without revenue growth
  

• Decline in asset turnover ratio
  

• Large proportion of intangible assets with declining net profit
  

Identifying these early can help investors avoid high-risk stocks.

Asset and liability analysis helps investors assess a company’s financial stability by examining what it owns and owes. It supports better judgment of long-term risks and complements other valuation tools for informed investment decisions.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.