Fundamental analysis takes into consideration everything
that affects a company. And these things include quantitative and qualitative
factors.
Quantitative factors are those that can be measured in terms
of numbers. These figures tell us quite quickly the things we need to know
about the financial health of a company. You can analyze these things to gauge
the strength of the company, ultimately deciding whether it is a good investment
or not.
And for this article, we’re going to focus on the balance
sheet, where we can find useful and important data about the company’s finance.
Further, we will narrow down the focus into the assets of the company found on
the balance sheet.
Read further: Fundamental Analysis: Intrinsic Value and Market Value
Assets on a Balance Sheet
The company’s balance sheet shows you what the company owns,
what the business owes, and the total equity of the shareholders. Let’s take a
look at the assets found on the balance sheet.
The Company’s Assets
In general, you can find two types of assets on a balance
sheet: the current asset and the non-current assets.
Current assets refer to the assets that the company will like
use up or convert into cash within 12 months or one business cycle. Current assets
are further divided into three important categories, which are the cash,
inventories, and account receivables.
Cash
Companies with large cash reserves are typically attractive
for investors. When the company has huge cash reserve, they are practically
insured against tough times like market crashes, market corrections, and volatilityand risks. Having cash can provide the company some option for future
expansion.
However, growing cash reserves do not always guarantee
strong performance. If you think the company has way too much cash reserve than
what is healthy, then you need to start asking questions. It could be a sign
that the company no longer has any investment opportunities. Nonetheless, a company
with very low cash reserve is a huge red flag for investors.
Inventories
Inventories refer to the products that the company has not
yet sold. In general, you want to see the company’s inventories to tie up with
their sales or cash. The company needs to sell the merchandise that they make
to suppliers. The red flag here is if the inventories grow faster than the cash
reserve.
Account Receivables
When we say account receivables, we refer to the company’s
uncollected bills. Based on this data, you can measure the company’s speed when
it comes to collecting what others owe.
Be wary of companies that take a long time to collect bills.
It’s better to see a company that collects cash quickly than one that waits
longer.
Non-current assets, on the other hand, are those that do not
belong to any of the above categories.
Conclusion
The balance sheet and the assets of the company are very important
to analyze if you want to gain an accurate measure of a company’s financial
health. However, fundamental analysis doesn’t only focus on what the company
owns but also on what it owes. So remember to check its liabilities too.
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