Assets we can divide into “current assets” and other assets. Current assets (CA or Total Current Assets-TCA) include:
- Marketable Securities: securities held by the company as a short-term investment, such as T-Bills, bonds, etc. can be considered as cash equivalents.
- AR- “Accounts receivable (AR) is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers. Accounts receivable are listed on the balance sheet as a current asset. AR is any amount of money owed by customers for purchases made on credit.”
- Inventory: “Inventory is the raw materials used to produce goods and the goods that are available for sale.”
- Prepaid expenses
- Other Current Assets
Current assets are liquid assets, which are funds that can be spent without the use of credit and converted into cash, quickly. You should ask yourself the following questions while conducting your analysis: Is it possible for the company to pay its obligations and liabilities with cash and accounts receivable (or other current assets)? If that’s the case, that’s fantastic. If not, I’ll have to figure out what a company can do. Is it possible for the company to take out a loan? Conditions?
If I’m aiming at the cash, I’ll have to ask the same question. However, there is no need to have a large sum of money in the company’s bank account. Is it possible for company to pay its obligations with cash and other current assets? The company’s profitability is the next critical question. Assume if the business generates enough cash or is referred to as a “cash cow.” The company does not require a large amount of cash on hand.
Other assets include:
- Non-marketable investments
- Deferred Income Taxes : When analyzing long-term debt, there is a necessary term, the average debt maturity. In 10K Filing, you can find the annual report of each listed company (or on the company’s website). If the company has a debt, it will be mentioned when it matures. Let’s say the debt needs to be paid off next year. Ask these questions:
- How will the company finance the maturing debt? Will it make the next bond emission? Will it take a loan? Will it just be refinanced by short-term debt?
- Is the company attractive enough to sell its shares to refinance it?
- Does the company have a strong balance sheet so that it can take on new debt?
- Does the company earn enough cash flow from operations to cover it without the new portion of debt?
- Deferred Income Taxes
- Postemployment benefit obligations
- Operating lease liabilities
- Other non-current liabilities
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