Financial statement ; 2) Balance Sheets ; assets

Hi everyone ,

Last time I was discussing the first type of Financial Statements, which as income statement and now we will look at balance sheets, in particular assets why they tell us so much information.(This is the first part for Balance sheets covering only assets) 

In one of the previous sessions Christopher Pittas , he defined for you what a balance sheet represents . Just a brief recap:

"A balance sheet is an annual list of a firms assets , liabilities and its overall equity"

1)Assets-the total amount of value that a company has  ( it could be in form of cash,inventory, bonds,etc. , pretty much everything that is valued by other parties with certain prize ) 

2) Liabilities- Debt , interest payment,salaries ,etc. - clearly things that the e.g. company's managers use for business development but its their own present property .

3)Equity is simply the the difference between the two.Note that I said the difference between the two because, shareholders equity can be both positive and negative.

Imagine that you have a company . How would organize your company? Do you think it is a good idea to invest all of your money in one thing and waiting for "success" ? What if something comes up and you cannot provide liquidity? For example, you need more capital in order to increase your output just because you found a new market , that you cannot supply , just because you have already invested all your money in one thing ( such as machinery ,etc. ). It gets messy, right?

That is why clever managers have planned the so-called short term (current) and long term assets.

Let's look at the first balance sheet , to give you some intuition about it :
We are looking at Juniper Network (JNPR ) :

We will look at the different indicators separately. We are looking at the balance sheet of  Juniper Networks Ticker (JNPR) ( Network and communication services ; USA ). Cash and cash equivalent would obviously be the most liquid assets because they can use them whenever they want. OK, so what you can do at this point is to see what is going on with this sector because obviously this company is holding a lot of cash- you may ask yourself : '' Is it because of the industry or is it because the company has some future plan about acquisition or new product that will be launched on the market. It would be a good idea to see what is happening with other companies in this industry ( P.S. you can always check out that, going to section ''Competitors that is on the official site of finance.yahoo.com ) Let's look at some of its competitors :

Competitor 1 Cisco System CSCO

Competitor 2 Alcatel-Lucent ALU 

From what I found you can see several tendencies:

1)Total current assets remain somewhat constant during the quarter period ( except for Alcatel because , they do not have official numbers for the last several quarters ). Reasons for that could be a lot that i am not going to talk about because this is not the objective of this post.

2) I will further show you on Excel table the ratio Total Current assets/Total Assets :

		JNPR	CSCO
Total Current Assets	Q4 Dec 31 2013	3540000	60689000
	Q3 Sep 30 2013	3654100	62796000
	Q2 Jun 30 2013	3680400	65521000
	Q1 Mar 31 2013	3703900	61417000
Total Assets	Q4 Dec 31 2013	10326000	98427000
	Q3 Sep 30 2013	10197700	100741000
	Q2 Jun 30 2013	10013700	101191000
	Q1 Mar 31 2013	9830400	97084000
Ratio TCA/TA	Q4 Dec 31 2013	0,34	0,62
	Q3 Sep 30 2013	0,36	0,62
	Q2 Jun 30 2013	0,37	0,65
	Q1 Mar 31 2013	0,38	0,63

Obviously , the ratio shows that the two companies have a lot of liquidity.

Going back to the different indicators that are included in current assets :

1) The main part of the current assets is going to be in cash and cash equivalent , normally it is going to be stored in bank accounts making interest for the company. As I already stated, it is good that the company has some liquidity in bad times , however , excessive cash is not a good indicator as well. 

2)Short term investments -those are not that liquid , it most probably be government bond but as you know, bonds have the so-called period of maturity, which is e.g. if you make a contract for 2 years to buy bonds, you cannot take this money whenever you want .

3) Net account receivables - We have already been through this in a  previous post but just as a reminder. Net receivables which is owed by the customers , they have already consumed whatever the good is , but they have not pay for it 

4) Inventory - those are all the goods that are in stock . For example , if a company has a lot of inventories , this could mean that they want to expand their business . This implies that the retail sector would be the one which the numbers for inventories are the most important . Imagine what would happen if the demand for 

a good is not satisfied just because there is not enough supply . Clearly , if the company is selling vegetables,fruits or other relatively short-term lasting foods , this could mean that the company may not have a lot of inventories ( although , in case of huge corporations , inventories are at dynamic change ) .

Now we will go through long term assets :

Those long term assets cannot be converted into liquidity .

Let's define them : 

1) The first one is Long term investment  , this is somewhat tricky because although it is called LT investments , it could be very liquid but the company values it a lot , and it needs it a lot , so it is not ready to give it away in the short term

2) Property plant and equipment -this is quite self explanatory; it depreciate over time and at some point it either has to be repaired, or exchanged for new PP&E

3) Goodwill -This is the trickiest of all . Its value is highly relativistic and it cannot be defined easily . Putting it simply , goodwill comes with one company acquire another . Suppose company A acquire company B . Now, A will take all the patents, brand name, customer's trust etc. - this is goodwill. So, A has to pay to B for all these "extras" in order to take advantage of all of them.

4) Intangible assets - these are the assets that can be seen , cannot be touched therefore they are not easily valued .

3) and 4) are somewhat misleading , they could sometimes be either overstated or understated .

This was the first part that is covering assets on Balance sheets , the next post will be about Liabilities.

I know that the subject may be overloaded with definitions , but once you start researching companies , you will see how helpful is to look at balance sheets even making up possible scenarios. 

Thank you again for reading ! 

Plamen