An Overview of Fundamental-Quantitative Analysis - Financial Statements - Part 2

Ashlar Online | July 29, 2016, midnight

Balance sheet can offer a valuable insight into the financial health of a company and help evaluate its worth better. It is an essential and integral part of the financial statements issued by any company and provides information on the company’s assets, liabilities and shareholders’ equity. Depending on if the company has sufficient resources to finance its activities efficiently or it relies heavily on debts for financing its operation, one can assess the health of a company. In short, if the shareholders’ equity is higher as compared with the liabilities, it means that the company has enough resources to finance its activities and vice versa.

 

Assets can be divided into two categories, namely current assets and fixed assets. The details of assets, as enumerated in the balance sheet, include:


Current Assets:


These are assets of a company which can be converted into cash during a business cycle. These include:

 

1.    Inventories:These are finished products waiting to be sold. Efficient management of inventories matters a lot and is a positive signal for company’s health. Inventory turnover is calculated by dividing cost of goods sold by average inventory which gives a fair idea of the pace at which ready merchandise moves into the market.


2.    Accounts Receivables: This denotes outstanding bills and it is desirable that dues are collected fast enough from customers to be able to pay salaries, loans and pay dividends among other things. Unnecessarily overdue receivables mean capital which can be constructively used for funding operations is stuck without much reason which cannot be good for the company.


3.    Cash:Good cash reserves are a healthy sign which shows that the company just needs to figure out quickly how to use it in a productive manner. However, if the company usually maintains high levels of cash reserves, it means that either they do not have the foresight to invest properly which is not a good sign for the company. On the other hand, a cash-starved company would also not do well at all.


4.    Marketable Securities: These are debt or equity securities held by the company which are expected to be sold within a year. These securities are usually reported at their market value in the balance sheet.


5.    Notes Receivable:These are usually short-term loans which carry a certain amount of interest like “promissory notes” and are reported in the balance sheet at the actual value that will be collected or their net realizable value.


6.    Prepaid Expenses:These include any payments made by the company in advance of receiving the services which include rent, taxes and insurance premiums amongst other things.


Long-Term Assets


These include any assets which may not be converted into cash or sold within a year. These include:


1.    Investments:Any and all investments which the company does not plan to sell within a year, including bonds, stocks as well as investments in any tangible assets currently not used or kept aside for use in the long-term. These long-term investments are usually reported at their market value in the balance sheet.


2.    Fixed Assets:These are assets like property, plant and equipment (PP&E) which are not converted to cash during a business cycle and instead are used for carrying out business operations. In case a company is liquidating its assets, these fixed assets might come into the picture which can occur only due to financially distressing conditions which leave no room for choice.


3.    Intangible Assets: These are essentially non-physical assets which have certain economic value attached to them as in case of copyrights, patents, franchises and trademarks amongst other things. It is relatively difficult to assess their actual value and the future returns or benefits arising from them are also more or less uncertain.


(Continued)

 

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