An in-depth explanation of current assets in English is Current Asset

Why Do Investors Need to Understand Working Capital Assets?

Financial statement analysis is a fundamental skill for value investors. Each balance sheet contains various components that indicate the company’s financial position. One often overlooked but very important component is working capital assets (English term: Current Asset). This figure tells us about the company’s ability to withstand financial crises and how it manages short-term resources.

What Exactly Are Working Capital Assets (Current Asset)?

Working capital assets are part of the assets on the balance sheet that represent the value of resources the company can convert into cash within one year. Simply put, this includes cash on hand or inventory that can be sold and converted into cash quickly.

The difference between working capital assets and non-current assets lies in how easily they can be converted into cash. Non-current assets like land and buildings take longer to sell and may not fetch the full amount, whereas working capital assets are more liquid.

What Types of Working Capital Assets Are There?

Cash (Cash)

This is the most liquid asset, as it can be used immediately for expenses or investments. However, holding too much cash can be a disadvantage because it does not generate returns. Companies that hoard excessive cash may miss opportunities to earn income.

Cash Equivalents (Cash Equivalents)

These assets are similar to cash and can be converted back into cash within a short period. They are characterized by earning interest as a return, though they carry some risk depending on the financial institution.

Short-Term Investments (Short-Term Investment)

Some companies invest in stocks or debt securities with less than one year to generate returns from surplus funds. These carry higher risks but also offer potential gains.

Notes Receivable (Notes Receivable)

Contracts to receive money from partners or customers with a period of less than one year. These assets earn interest but carry the risk that the counterparty may default.

Accounts Receivable (Accounts Receivable)

Amounts owed by customers that are still outstanding. This asset often results from flexible business operations that allow customers to pay gradually. However, there is a risk of bad debt if customers face financial difficulties.

Inventory (Inventory)

Raw materials or finished goods waiting to be sold. These can be converted into cash through future sales. Investors should monitor whether inventory levels are increasing or decreasing, as excess inventory can become a sunk cost for the company.

Supplies (Supplies)

Office materials and consumables used in daily operations.

Accrued Revenue & Prepaid Expenses (Accrued Revenue & Prepaid Expenses)

Revenue that is expected to be received in the future and expenses paid in advance for benefits to be received later.

Example of Reading Working Capital Assets: Apple Case Study

Apple Inc. (APPL) is a good example of effective working capital management. During the early 2020 shareholder meeting, coinciding with the start of COVID-19, CEO Tim Cook confirmed that liquidity was not an issue for the company.

Looking at Apple’s 2019 annual balance sheet, total working capital assets amounted to $162,819 million, with cash and cash equivalents totaling $59 million.

However, in 2020, notable changes occurred:

• Working capital assets decreased from $143 million to $135 million.
• Cash and cash equivalents dropped significantly from $90 million to $48 million (decreased by 46%).
• Receivables increased from $37 million to $60 million (up 62.7%).

This shift may indicate that Apple changed its billing policies with partners or reflects a change in business operations.

Hidden Meanings in Working Capital Figures

The numbers on the balance sheet reveal many insights. First, they indicate the company’s ability to handle financial crises. In emergencies like a pandemic, the company can convert these assets into cash to pay employees, rent, and maintenance costs.

Second, the types of working capital assets reflect the quality of liquidity. Cash and high-credit receivables are reliably convertible into cash, but long-overdue receivables can be problematic. Therefore, value investors should scrutinize what comprises the working capital assets and assess their quality.

Going Deeper in Analysis

While the total working capital figure provides an overview of short-term liquidity, investors should delve into the details. Ask yourself:

• Why did inventory increase or decrease?
• Does an increase in receivables indicate strong sales or collection issues?
• Where did the cash go? Was it invested or used to pay off debt?

These questions help you understand the company’s true capacity, not just the raw numbers.

Summary

Working capital assets (Current Asset) are a crucial dimension in financial analysis. They indicate short-term liquidity and the company’s resilience to financial shocks. While the total figure is useful, analyzing the types and changes of each asset category provides insights into asset quality and how the company manages its funds. The difference between superficial and in-depth analysis can be the difference between making smart investment decisions and taking unnecessary risks.