1.1.3 Assets

1.1.3 Assets

The assets of a company are the things  it owns – including goods waiting to be sold and the property used to produce and sell goods and services. Because companies invest in assets in order to fulfill their mission, it is critical to develop an intuitive understanding of these assets. Think about Haagen-Dazs Ice Cream. What do you think it invests in to fulfill its mission? You might easily imagine that it will own the ice cream it’s going to sell, factories to make that ice cream, and the trucks to deliver ice cream.  Assets are no more complicated than that.

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So What’s Really Interesting?

Assets
Balance Sheet Percentages A B C D E F G H I J K L M N
Cash and marketable securities 35 4 27 25 20 54 64 9 5 16 4 2 16 7
Accounts receivable 10 4 21 7 16 12 5 3 4 26 6 2 2 83
Inventories 19 38 3 4 0 1 0 3 21 17 21 3 0 0
Other current assets 1 9 8 5 4 4 6 6 2 4 1 2 5 0
Plant & equipment (net) 22 16 4 8 46 7 16 47 60 32 36 60 69 0
Other assets 13 29 37 52 14 22 10 32 7 5 32 31 9 10
Total assets 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Take a look at the assets on the balance sheets of these companies.  Identify three numbers that seem interesting or intriguing to you. Why are they so interesting?

Cash and Marketable Securities

The first asset listed here is the amount of cash a company has on hand.  While some of this cash may be in cash registers, most of it is sitting in financial institutions – just like a person,  a company may carry around some cash, but most of its cash is in a bank account.  Marketable securities are investments that companies can quickly convert to cash – much as how you might use a money market account.

One notable feature of cash and marketable securities, though, is that they don’t generate much, if any, of a return. So why hold cash?  This is one of the modern puzzles of finance – companies are holding far more cash than ever before – more than $2 trillion, in fact – in aggregate. This is a puzzle that we’ll wrestle with as we continue.

 

Like a company, you hold cash as one of your assets. Why do you hold cash in bank accounts that don’t generate any interest? And, how do you decide how much to keep in those accounts?

Accounts Receivable

Accounts Receivable are, unsurprisingly, amounts that a company expects to receive from its customers in the future.

As trust grows in a relationship between a company and its customers, the company might be willing to allow customers to pay them later – just like a “tab” at a bar.  Many companies extend credit to their customers – often allowing their customers, usually other businesses, to pay after  30, 60, or even 90 days.

 

Let’s look at the numbers.  In 2015, Walmart had an Accounts Receivable balance of $5.6 billion and $482.1 billion in Sales, roughly 1.1%.  Staples had $1.4 billion in Accounts Receivable, to $21.1 billion in Sales, about 6.7%.   And Intel had $4.8 billion in Accounts Receivable to $55.4 billion in Sales – 8.7%.

Companies that do more business with other companies will have a higher amount of their sales reflected as receivables.

 

Inventories

Inventories are the goods (or the inputs that become those goods) that a company intends to sell. Inventories include raw materials, products that are being finished, as well as final goods. For Haagen-Dazs, its Inventories include all the ice cream it produces and the associated ingredients needed to make the ice cream.

Best Buy, a large consumer electronics retailer, sells everything from televisions to computers and home appliances. It has different Inventory policies for home appliances like ovens and for LCD televisions. What kind of Inventory – ovens or LCD televisions – should Best Buy be more willing to hold on to? Put another way, if Best Buy has an oven and an LCD television that have both been sitting on their shelves for a year, which should they keep trying to sell, and which should they remove?

Because LCD televisions have a significantly higher rate of technological change than ovens, that type of Inventory is much more likely to become obsolete while Best Buy is holding it. As a consequence it’s riskier. From a finance perspective, the key attribute for how willing a company is to hold on to Inventory is how risky it is.

A large-scale financial crisis, like the one that occurred in 2008, can have a big impact on the Inventory levels of companies. What do you think happened to the level of Inventory, as compared to Sales, before and after the financial crisis? (Inventory, divided by Sales)

Consider the following chart, from the US Census Bureau, which tracks the ratio of Inventory to Sales during the last ten years.

As you can see, Inventories compared to Sales spiked upward during the financial crisis and then quickly came back down. Was that what you expected?

Inventories/Sales are going up again and have been for the last several years. What does that mean? Is it good news or bad news? Take a moment and think about it – we’ll find out when we meet again in several years!

 

Property, Plant, and Equipment

Property, Plant, and Equipment are the tangible, long-term assets that a company uses to produce or distribute its product. This can include its headquarters, factories, machines in those factories, and stores.

Other Assets

Other Assets can mean many things.  One particularly important component of Other Assets is Goodwill.  When a company acquire another company for more than the book value of its Assets, that difference is typically recorded on its balance sheets as Goodwill.

Microsoft recently spent $26.2 billion to acquire LinkedIn, a company with Assets that had a book value of $7.0 billion.  The other $19.2 billion paid by Microsoft will likely show up on Microsoft’s balance sheet as an Other Asset called Goodwill. What was Microsoft paying for that was worth that $19.2 billion?

There are several possibilities, but a few to consider would be:

  • Microsoft could use LinkedIn’s user information and profiles to optimize its marketing materials.
  • LinkedIn’s customer lists could be used by Microsoft to target future product sales.
  • Microsoft could use LinkedIn’s technology to incorporate social networking into its future products.