How can you tell if a company will survive a financial crisis? Let's take a look at this financial statement.

The Importance of Reading Financial Statements and Why Understanding Assets Matters

When assessing the strength of a company for investment, reading financial statements becomes an essential skill that cannot be overlooked. However, financial statements are filled with numerous figures that often confuse investors, especially in sections related to assets, which are divided into several categories.

One area that often receives particular attention is current assets because this figure indicates the company’s ability to survive during financial hardship.

Learn from Apple how current assets are important

Apple Inc. (APPL) is recognized as having the highest market value in the United States. But what’s even more interesting is its high liquidity. In 2020, during COVID-19, CEO Tim Cook confirmed that liquidity was not a problem for the company. This statement reflects that Apple holds a massive amount of current assets.

Looking at the actual figures at the end of 2019, Apple had total current assets of $162,819 million, and cash and cash equivalents amounted to $59 million. This shows that the company has a large amount of cash in hand.

However, compared to 2020, the asset structure changed. Cash and cash equivalents (Cash & Cash Equivalents) decreased from $90 million to only $48 million (decreased 46%), while trade receivables (Receivable) increased from $37 million to $60 million (up 62.7%). This event may indicate a change in collection policies or credit management capabilities.

Why divide assets into two categories

Assets on the balance sheet are divided into two main types. The difference lies in how quickly they can be converted into cash.

Current assets can be converted back into cash within 1 year, while non-current assets are assets held by the company for more than 1 year and are not easily converted into cash, such as land, buildings, and machinery.

This separation helps investors better assess the company’s ability to handle emergencies.

What does current assets include?

When delving into current assets, the following types are typically found:

Cash (Cash) is the most liquid asset, available for immediate debt payments. However, holding too much cash may not generate returns.

Cash Equivalents (Cash Equivalents) are similar to cash but carry slight risks from banking factors. They also earn interest.

Short-term Investments (Short-term Investment) are plans to sell within a year, such as stocks, gold, or bonds. These investments carry risks but can generate returns.

Notes Receivable (Notes Receivable) are short-term debt agreements, such as loans or trade agreements, with risks of default.

Trade Receivables (Receivable) are outstanding amounts owed by customers. In a crisis, collection may be delayed or impossible.

Inventory (Inventory) includes raw materials and finished goods waiting to be sold. Investors should be cautious here, as unsold old stock can become a sunk cost.

Supplies (Supplies) are various consumable materials, usually in small quantities.

Accrued Revenue & Prepaid Expenses (Accrued Revenue & Prepaid Expenses) are revenues that are certain to be received and expenses paid in advance for future benefits.

What should investors look for when reading current assets?

When reviewing the balance sheet, current assets appear as the first line item. Large figures indicate the company’s short-term liquidity.

But another crucial aspect is the quality of these assets. Cash and deposits are essential because they can be converted into liquidity without issue. However, trade receivables or inventory carry risks—during crises like COVID-19, companies might be unable to sell products or customers might default.

Therefore, high-quality current assets include cash, deposits, and notes receivable. Non-current assets are also important in assessing whether the company has a solid financial foundation.

How to evaluate a company’s current assets

Besides examining the overall figures, investors should analyze the components, such as:

• Whether cash has increased or decreased compared to last year
• Whether receivables are trending upward (which might indicate poor sales)
• How inventory levels have changed

Monitoring these aspects provides a clearer picture.

Summary of current assets

Current assets are a key indicator of short-term liquidity and crisis management capability. Large figures suggest the company has substantial “book liquidity,” but the quality of these assets is equally important.

Investors should not only study the total numbers but also understand the proportions of cash, receivables, and inventory. In a crisis, how much of these assets can be converted back into cash? These insights are crucial for making informed investment decisions.