Balance Sheet of a company can be used to know the strengths/weaknesses of a company, we will learn about some important aspects which help us to invest better in stocks and are reflected in the balance sheet. They are Current Assets and Current Liabilities.
Current Assets :
A rough definition of current assets would be those assets which the company can use to generate cash within 6 months at any given time.
Current Liabilities :
Again these are liabilities which the company has identified as being of a short term nature.
Working Capital :
Subtracting current liabilities from current assets gives the Working Capital available with the company also known as the Net Current Asset.
- A positive Working Capital shows that the company has enough money to fund its day to day operations as well as any short term capital funding requirements.
- Not having enough working capital may signify that the company is in trouble and having cash flow problems.
- On the other hand, having too much net current asset may signal that the management is not investing in long term which maybe due to lack of vision. This may also indicate underlying insecurities about the future plans.
Though the working capital is not the sole factor before deciding to invest in stocks, it can certainly help to gauge a company when used in conjunction with other such parameters.
We will look into some other aspects of balance sheet and see how it can help our investment decisions in future posts. We hope this will help in learning to invest in stocks to a great extent.
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