Thursday, 2 August 2012

Balance Sheet Pt-3

In this post will learn about a few other aspects of balance sheet which help us decide on our investments. These are Long Term Assets and Long Term Liabilities.

Long Term Assets :

These are typically assets which take more than 1 year to be converted into cash in case of any necessity. If a company has more long term assets then it means the management is investing in the long term future.

Long Term Liability :

These are commitments which are of a long term nature. Like loans etc which take over 1 year to repay. A company may take debts and loans which are for the long term to build infrastructure and create long term assets. So, long term liability also indicates that the company is serious about its existence and relevance.

Long Term Assets and Liabilities

The sum of current assets and long term assets is called Total Assets and the sum of current liabilities and long term liabilities is called Total Liabilities.

Net Worth :

Subtracting Total Liabilities from Total Assets gives the Net Assets that the company has on its books. This is also know as the Net Worth of the company.
Networth Equation

  • The Net Worth gives a correct insight into the financial strength of the company.
  • A company having a high net worth is strong financially and can wither away economic adversities easily on the strength of its assets.
  • A company having high Net Worth has a comfortable cushion to take on any financial unpredictability and can withstand recessions.
  • On the other hand, a company having meagre Net Worth (High Debts or Low Assets) may not meet the challenges easily and may go bust in case of hostile financial situations.

One more parameter can also be deduced from the Net Worth. In case of the unlikely situation of liquidation of the company  then the Net Worth will be equal to the Shareholder Equity. This is the total amount that will be divided amongst the shareholders of the company.

Our journey of learning to invest in stocks will continue with future posts.