how should i evaluate a balance sheet when deciding whether to invest in a company?

I often like to start with looking at the cash balances and cash Equivalents, as well as loans held by the company. Then, I look into the following:

Solvency Ratios ie.

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

Both ratios look at a companies abilities to pay back it's short term obligations with its liquid assets. The higher the ratio (above 1) the better.

Debt / Equity Ratios ie.

• Total Debt/Equity Ratio = Total Liabilities / Shareholders Equity
• Long Term Debt/Equity Ratio = Long Term Debt / Shareholders Equity
• Short Term Debt/Equity Ratio = Short Term Debt / Shareholders Equity

A high ratio indicates that the company has been growing due to debt. Note that if this ratio is high, always look at how much it's paying off in interest payments in interest expense.

Cash Conversion Cycle ie

• Days Inventory Outstanding: (Inventory / COGS) x 365
• Days Sales Outstanding: (Accounts Payable / COGS) x 365
  – Days Payable Outstanding: (Accounts Payable / COGS) x 365

The lower the cash conversion cycle, the better. Cash drives earnings. The faster the cycle of cash, the quicker it can be reinvested into more products and services to generate
more earnings. Rinse and repeat.

Some numbers to look at are
1. Net current assets per share
2. Debt/Equity ratio
3. Return on Equity
4. Current ratio