From the double-entry bookkeeping of Italian merchants (described by Benedetto Cotrugli in 1458), first printed by Luca Pacioli (Summa de arithmetica, 1494), and taught as standard practice by Richard A. Brealey and Stewart C. Myers (Principles of Corporate Finance, 1981), joined by Franklin Allen from the eighth edition.
Reads a business or decision through its stocks of assets, obligations, and equity alongside its flows, catching structural risks an income-only view misses.
When to reach for it
When judging resilience, a leveraged expansion, an acquisition, or a long commitment where this year's profit hides what is building underneath.
How it runs
- Read the balance sheet beside the income statement, over several periods.
- Test whether assets are worth their book value.
- List all obligations, including those off the balance sheet.
- Compute liquidity and leverage ratios and track their trend.
- Ask what the decision adds to the stocks as well as the flows.
Where it sits in SOLVE eX
Go to the source
- Summa de arithmetica, geometria, proportioni et proportionalita, 1494
- Principles of Corporate Finance, McGraw-Hill; Franklin Allen co-author from the eighth edition, 1981