Why do investors need to understand current assets and non-current assets?

Short-term liquidity is one of the most important indicators for assessing a company’s ability to survive. Understanding how quickly a business can convert assets into cash allows investors to better analyze risks and opportunities. Financial statements, especially the sections detailing various assets, reflect the strength of the financial position.

Basic Concept: Current and Non-Current Assets

The balance sheet categorizes assets into two main types, each playing a different role in evaluating the company’s financial health.

Assets that can be converted into cash in the short term refer to assets that the company can liquidate within one year or less. These are crucial tools for weathering unforeseen financial crises. For example, if a company faces a situation where revenue stalls due to special events (such as during COVID-19), it can use these assets to fund payroll, utilities, and other expenses.

Conversely, non-current assets are assets that take longer than one year to convert into cash, or sometimes cannot be converted at all. These assets are important for long-term management but cannot resolve liquidity issues. Examples include office buildings, machinery, land, or investments in other companies.

The Value of Asset Classification

The main difference is convertibility into cash. However, it’s not just about speed; each asset type has its own characteristics, ranging from low to high risk. Companies with high-valued non-current assets may have limited bargaining power for cash access, while holding many non-current assets might indicate a stable production base for long-term growth.

Current Assets: Types and Characteristics

Cash and near-cash equivalents

Cash is the most liquid asset, usable immediately to settle debts. The downside is that it yields no return. Companies holding excessive cash might miss investment opportunities or potential gains.

Deposits and equivalents are assets that can be quickly converted into cash and earn interest as rewards. The risk lies in the stability of the financial institutions holding these assets.

Short-term investments and equity securities

Companies with surplus funds often choose to invest in stocks or bonds for short-term income. However, these investments carry risks from price volatility. Returns can be high, but losses are also possible.

Accounts receivable and receivables contracts

Trade receivables are amounts owed by customers that the company has not yet collected. An increase indicates more credit sales. Receivables contracts are debts with clear payment terms or schedules. Both carry the risk of default.

Inventory

Goods, raw materials, and finished products not yet sold are assets with risk because they may depreciate in value if outdated or deteriorate. Investors should watch whether the company accumulates unsold inventory in large quantities.

Supplies, prepaid expenses, and accrued income

Office supplies and documents are low-value assets but necessary for operations. Prepaid expenses are payments made in advance for future services, such as insurance or rent. Accrued income is income that will definitely be received but has not yet been recorded.

What Can the Balance Sheet Tell Us?

The amount of current assets on the balance sheet provides a snapshot of how liquid the company is at that moment. Companies with high current assets can:

• Pay short-term debts easily
• Support short-term income fluctuations
• Have flexibility in contract negotiations
• Quickly respond to business opportunities

However, asset quality is as important as quantity. For example, cash and deposits are guaranteed to be converted into cash, but trade receivables may not be collectible during a crisis. Investors need to understand this distinction.

Additionally, comparing the size of current assets to short-term liabilities (Current Ratio) is the simplest way to assess whether a business can survive a crisis.

Real Case Study: Changes in Apple’s Current Assets

Apple Inc. is a true leader in liquidity management. In the 2020 shareholder meeting, CEO Tim Cook stated that liquidity is not an issue for the company.

However, comparing balance sheet data between years:

• Total current assets decreased from approximately $162,819 million to $143 million (in 2020, decreased further to $135 million)
• Cash and cash equivalents significantly declined from $90 million to $48 million (a 46% decrease)
• Trade receivables increased markedly from $37 million to $60 million (a 62.7% increase)

This change indicates:

Apple may have shifted its collection policies, allowing distributors and retailers (retailer) longer payment periods. This is a common strategy among strong companies, as they can “borrow” money during the waiting period. The reward is that short-term liquidity might decrease, but investors need not worry because Apple still has sufficient cash and can generate additional income confidently.

Importance of Non-Current Assets

While current assets answer the question “Do we have money for tomorrow?”, non-current assets address “Can we create value over the long term?”

Non-current assets include:

• Land, buildings, and machinery as foundations for production and value creation
• Rights and licenses granting operational permissions
• Intangible assets such as trademarks, formulas, and technologies
• Long-term investments in other companies or bonds

Companies with large amounts of non-current assets may have:

• A stable production base
• High capital requirements to start up (capital intensive)
• Risks of obsolescence of equipment
• Better pricing power

Deep Analysis: Beyond the Numbers

Investors often make the mistake of only looking at total current assets. In reality, they should also evaluate:

1. Asset quality: $100 in cash is not equivalent to $100 worth of inventory that might not sell.
2. Trends: Increasing or decreasing assets indicate growth or contraction.
3. Industry comparison: How does the company’s current asset ratio compare to peers?
4. Ratios: Calculations like Current Ratio, Quick Ratio, Cash Ratio help measure liquidity and debt-paying ability.

Summary

Current and non-current assets together provide a comprehensive picture of a company’s health.

Current assets indicate short-term liquidity and safety, while non-current assets reflect long-term capacity and potential.

Investors who understand both sides can better judge whether a company is prepared to survive tough times and sustain growth. Deep financial statement analysis through asset evaluation is a skill that should not be overlooked.