Posted in Finance, Accounting and Economics Terms, Total Reads: 89
Definition: Clean Balance Sheet
Clean Balance Sheet is showed by a zero or negligible debt in an organization's balance sheet for a specific period. It means that the organizations' debt/equity ratio is almost zero which decreases it chance of defaulting in payment to creditors. This helps the organization to have a high credit rating in the market.
Companies with clean balance sheet are attractive for the investors as they show very little risk on their investments compared to the companies who are highly in debt. Also borrowing rates/interest rates for such companies are also less in compared to companies that don’t have clean balance sheet.
For example: Indigo Airlines maintains a clean balance sheet as it works on very little amount of debt in compared to its rivals in the airline industry making it the most attractive company to invest in and even lending rates for Indigo would be less compared to its rivals.
Maintaining a clean balance sheet is very challenging for companies whose revenues are highly seasonal. Industries like metals, mining, and extraction are hugely debt based companies as they require huge investments on timely basis so for them it’s a huge challenge to maintain a clean balance sheet. So lending rates for such companies are high as their balance sheet makes them look very risky.