What does current assets indicate about the company's financial health?

When analyzing a company for investment, investors often focus on profit and revenue. However, there is a small but immensely valuable piece of information in the balance sheet: Current Assets, which indicate the company’s short-term financial strength. In times of unforeseen crises, whether the company can continue operating largely depends on these assets.

Current Assets are about the ability to survive

The balance sheet is divided into various asset types, which can be classified in two ways: those that can be easily converted into cash and those that are more difficult. Current Assets are funds that the company can convert back into cash within one year. This figure is very important because it shows whether the company has enough monthly funds to pay bills, rent, salaries, and other expenses.

What differs from non-current assets (such as land, buildings, machinery) is that converting them into cash takes longer. Current assets can be converted quickly. If a company faces issues like COVID-19 that force temporary sales halts, large current assets can be a lifesaver.

What do current assets include?

Cash and deposits are number one

Cash (Cash) is the most valuable, usable immediately but with no return. Cash Equivalents (Cash Equivalents) can be withdrawn quickly in case of urgent matters, almost as fast as cash, and they also earn interest.

Short-term investments are opportunities

Short-term investments (Short Term Investment) include stocks, bonds, gold, or other securities that the company intends to hold for less than a year. They carry more risk than cash but also offer potential returns.

Notes receivable and receivables

Notes receivable (Notes Receivable) are agreements where trading partners or customers agree to pay the company in the near future, similar to a loan contract. Trade receivables (Receivables) are amounts owed by customers that are still unpaid. Both can be risky if customers are unable to pay.

Inventory and other supplies

Inventory (Inventory) includes raw materials or finished goods waiting to be sold. The return comes from sales. Companies with large unsold inventory may face problems. Office supplies (Supplies) are consumable items. Unearned revenue and prepaid expenses are amounts expected to be received or paid for use in the future.

How deep should you analyze the actual financial statements?

Simply looking at the numbers of current assets is not enough. Value-focused investors need to understand what makes up those figures. For example, $100 million in cash is stronger than $100 million in receivables because receivables may not be collected on time. Companies that, during crises, have receivables turn into bad debts are definitely disappointing.

The composition of current assets indicates quality. One part is assets that are reliable, such as cash and deposits. The other part depends on unpredictable factors, like the ability to collect receivables or sell inventory.

Example from Apple Inc.

Apple (AAPL) is a prime example of a company with excellent liquidity. During the early 2020 shareholder meeting, while the world was concerned about COVID-19, CEO Tim Cook summarized that liquidity was not a concern.

At the end of 2019, Apple had total current assets of $162,819 million, including cash and near-cash assets $59 million dollars.

By 2020, current assets slightly decreased from $143 million to $135 million dollars. Notably:

Cash decreased significantly: from $90 million to $48 million dollars, a 46% reduction (.

Receivables increased markedly: from )million to $37 million dollars, a 62.7% increase $60 .

This change could mean Apple adopted a more flexible collection policy or that the risk of collecting from partners has increased. Investors observing these shifts can conduct further analysis.

Making smart investment decisions

In summary, current assets tell the company’s story. They indicate whether the company has enough funds to weather a crisis, but they don’t tell the whole story.

When reading financial statements, investors should not only look at the numbers but also understand their sources. If most of the current assets come from risky receivables or unsold inventory, that isn’t as reassuring as it seems.

However, if most current assets are cash, deposits, or highly collectible receivables from trustworthy partners, it shows the company has a solid financial foundation and is better prepared for unforeseen circumstances. This is something beginner investors should pay close attention to when studying a company before making an investment decision.