Below we give an exact illustration of what assets, liabilities, and equity mean and what they consist of. Although accounting is not for everyone, we do not need to know detailed accounting when analyzing the balance sheet. We just need to know the purpose of each balance sheet component.
In our opinion, when looking for investment opportunities, it is a critical element in the assessment that Total Current Assets are significantly larger than Total Current Liabilities. TCAs represent short-term assets such as cash, marketable securities, accounts receivable, and inventory. These are the so-called very liquid money that the company can dispose of almost immediately. TCLs represent the company’s short-term liabilities, i.e., the money the company owes its creditors, employees, and suppliers (within one-year). In this case, the company must have TCA> TCL in the long run. Ideally, there should be some reserves to cover unforeseen short-term liabilities. There will be several situations during the economic cycle where there will be a shock in the economy.