Assets: What the Company Owns#

Assets are everything of value that a company owns or controls. Understanding assets helps you evaluate what resources a company has to generate future profits.

Assets are listed in order of liquidity—how quickly they can be converted to cash. Cash comes first (most liquid), followed by items that take progressively longer to convert.

Current Assets#

Current assets are expected to be converted to cash within one year. They indicate short-term liquidity.

Cash and Cash Equivalents#

The most liquid asset—actual cash and investments easily converted to cash (like money market funds or Treasury bills maturing within 90 days).

What to look for:

Is there enough cash to cover short-term obligations?
Is cash growing or shrinking over time?
Is too much cash sitting idle (not invested productively)?

Accounts Receivable#

Money owed to the company by customers who bought on credit.

Scenario	What It Suggests
Receivables growing faster than revenue	Customers are slow to pay—potential collection issues
Receivables growing with revenue	Normal—more sales means more receivables
Receivables declining while revenue grows	Good—collecting faster

Bad Debt Warning

Not all receivables will be collected. Companies estimate "allowance for doubtful accounts" to account for expected defaults. Watch for this provision as a percentage of receivables.

Inventory#

Goods held for sale. This can include:

Raw materials - Inputs waiting to be used
Work-in-progress - Partially completed goods
Finished goods - Ready for sale

Inventory Analysis:

Pattern	Interpretation
Inventory growing faster than sales	Potential problem—products not selling
Inventory turns declining	Goods sitting longer—could become obsolete
Inventory write-downs	Company admitting goods worth less than recorded

Industry Matters

Inventory significance varies by business. Retailers and manufacturers have substantial inventory; software companies have almost none.

Prepaid Expenses#

Payments made in advance for future services (like insurance premiums or rent paid ahead).

Other Current Assets#

May include short-term investments, tax refunds expected, and other items.

Non-Current Assets#

Non-current (or long-term) assets aren't expected to convert to cash within a year. They represent long-term investments in the business.

Property, Plant & Equipment (PP&E)#

Physical, tangible assets used in operations:

Land and buildings
Manufacturing equipment
Computers and servers
Vehicles
Furniture and fixtures

PP&E is typically shown at:

Gross PP&E (original cost)
Minus: Accumulated depreciation
Equals: Net PP&E (book value)

Capital-intensive businesses (manufacturing, airlines, utilities) have significant PP&E. Asset-light businesses (software, consulting) have relatively little.

Intangible Assets#

Non-physical assets that have value:

Type	Examples
Patents	Exclusive rights to inventions
Trademarks	Brand names and logos
Copyrights	Creative works
Software	Developed or purchased technology
Customer relationships	Value of acquired customer base

Intangible assets are typically amortized over their useful life (like depreciation for physical assets).

Goodwill#

Goodwill is a special intangible asset that arises from acquisitions:

Goodwill = Purchase Price - Fair Value of Net Assets Acquired

When a company pays more for an acquisition than the tangible assets are worth, the excess is recorded as goodwill. It represents things like brand value, customer loyalty, and employee talent.

Goodwill Impairment

Goodwill doesn't depreciate but must be tested annually for impairment. If the acquired business isn't worth what was paid, the company must write down goodwill—often a huge charge that signals a failed acquisition.

Long-term Investments#

Investments in other companies' stocks, bonds, or other securities that the company intends to hold for more than a year.

Other Non-Current Assets#

May include deferred tax assets, long-term receivables, and other items.

Asset Quality#

Not all assets are equally valuable. Assess quality by asking:

Liquidity#

How quickly can it be converted to cash?
At what discount to book value?

Productivity#

Does the asset generate returns?
Is equipment modern or obsolete?

Reliability#

Will receivables actually be collected?
Will inventory actually be sold?

Hidden Value and Risk

Assets are recorded at historical cost (with adjustments), not market value. Real estate might be worth far more than its book value. Conversely, specialized equipment might be worth far less if the company needs to sell it quickly.

Asset Mix by Industry#

Different businesses have very different asset compositions:

Business Type	Primary Assets
Bank	Loans, investments, minimal PP&E
Manufacturer	Heavy PP&E, inventory
Retailer	Inventory, store properties
Software Company	Intangibles, cash, minimal inventory
Real Estate	Properties and land
Consulting Firm	Receivables, minimal hard assets

Understanding the typical asset mix for an industry helps you spot anomalies.

Red Flags in Assets#

Watch for these warning signs:

Red Flag	What It Might Mean
Cash declining rapidly	Burning through reserves
Receivables growing much faster than revenue	Collection problems or aggressive revenue recognition
Inventory building up	Products not selling
Large goodwill relative to equity	Risk of future impairments
Increasing intangibles without clear source	Capitalizing expenses to boost profits

Key Takeaways

Current assets (cash, receivables, inventory) are expected to convert to cash within a year
Non-current assets (PP&E, intangibles, goodwill) are long-term
Assets are listed in order of liquidity
Different industries have very different asset compositions
Assess asset quality—not all assets are equally valuable or liquid
Watch for red flags like receivables or inventory growing faster than revenue
Goodwill represents acquisition premiums and can be written down if acquisitions fail