Understand current assets and non-current assets for smart investing

Why Non-Current Assets Are Important in Financial Statements

Investors focused on value discovery need to learn how to analyze the (Balance Sheet) to assess financial strength and management potential. A component that many overlook is the difference between current assets and non-current assets. Classifying these figures helps us see how flexible a company is financially when facing risks.

Basic Differences: Current Assets vs. Non-Current Assets

The balance sheet divides assets into two main categories, each telling a different story about the company’s status.

Current Assets (Current Asset) refer to resources that the company can convert into cash within one year from the reporting date. The higher this amount, the more capable the company is of handling liquidity issues. Keeping financial records in this form means that in unforeseen situations, such as sales disruptions or delayed payments, the company can still reserve cash to pay loans, wages, and other expenses.

Non-Current Assets (Noncurrent Asset) are, on the other hand, goods or investments that the company expects to hold for more than a year. Because these assets take longer to convert into cash, the company must rely on other sources of funds for daily operations. However, these assets are also highly valuable for enhancing production efficiency and generating long-term income.

10 Types of Non-Current Assets and Their Classifications

When investors examine the current assets section of the balance sheet, they will find a variety of items, each with its own characteristics.

1. Cash and Cash Equivalents

Cash is considered the most liquid asset, available for immediate spending or debt repayment. Although cash itself yields no return, companies often hold it for proper management. Deposits in checking or savings accounts are options for storing cash, despite potential risks related to the stability of financial institutions.

2. Short-term Investments

Sometimes, companies choose to invest a portion of their cash in bonds, stocks, or other financial instruments that can be sold within a year. This is one way to generate returns from unused cash, though these investments may carry risks.

3. Trade Receivables

Receivables are amounts owed by customers, arising from credit sales for business convenience. These will become cash once paid, but carry the risk of default depending on the customer’s payment history.

4. Notes Receivable

Written promises of loans or sales with a term less than a year. These notes may accrue interest but also carry the risk of default.

5. Inventory

Goods produced or purchased for resale. Sometimes, high inventory levels may indicate sales problems or inefficient inventory management. Investors should observe whether inventory is increasing or decreasing over time.

6. Office Supplies and Consumables

Materials used in daily operations, such as paper, pens, and other office equipment, which will be used up in the short term.

7. Prepaid Expenses

Payments made in advance for services or goods to be received in the future, such as insurance, rent, or membership fees, until the services are rendered.

8. Accounts Receivable

Amounts the company should receive but have not yet been collected, based on revenue recognition principles. These are usually converted to cash soon.

9. Short-term Infrastructure Assets

Other tangible assets expected to be converted into cash in the short term, such as damaged inventory or items for sale.

10. Other Current Non-Current Assets

Some companies may classify certain assets as current if they expect to realize them within a year.

What Financial Statements Reveal Through Current Assets

The quantity and composition of current assets provide insights into a company’s operational capacity. During challenging times such as pandemics, market downturns, or sales halts, companies with substantial current assets have clues and tools to navigate these situations.

Furthermore, the composition of current assets indicates liquidity. Companies with a high proportion of cash and notes are generally more trustworthy than those with large receivables or high inventory, as holding cash involves risks of default and slowdown.

Analyzing Apple to Understand Indicators of Current Assets

Apple Inc. is recognized as one of the most liquid companies globally. During the early 2020 shareholder meeting, at the start of some projects, CEO Tim Cook confirmed that liquidity was not a concern for Apple.

At the end of fiscal year 2019, it reported $162.8 billion in current assets, including (Cash & Cash Equivalents) amounting to $59 trillion dollars.

However, a few years later, the figures changed significantly. In 2020, current assets decreased slightly to $135 trillion dollars, which is not a warning sign, but the change is noteworthy. Cash and cash equivalents declined by 46% to $48 trillion dollars, while trade receivables increased from $37 billion to $60 billion, up 62.7%.

This change may reflect a strategic shift in collection policies or indicate increased challenges in collecting from customers.

Summary: Using Current Asset Data for Investment Decisions

Financial statements depict short-term liquidity through current asset figures. However, paying additional attention to all components is crucial. Not only the total amount but also the quality of each element indicates the company’s cash-generating ability.

Discernible investors should ask: Can these assets truly be converted into cash? How would they fare in a crisis like a blockade? Which components provide confidence, and which might pose risks? This in-depth analysis enhances your ability to identify financially prepared companies capable of navigating challenging periods. With this information, you can make more informed investment decisions.