Analyze Balance Sheet through Laser Eye- Part 02

Part 02

 

The Property/ Plant/ Equipment – This Section shows the investment in long-term assets made by the business. This includes the property needed to run the business and the land used to establish the factories and yards of the business. One of the secrets of highly successful businesses is that they don't always invest in property plant and equipment. Therefore, the money earned from their profits remains in the business itself. ( money do not outflow from business) Another characteristic of many businesses is that they are less likely to have competitors. This is because a new business spends a lot of money on PPE and that business is reluctant to enter the industry.

 

Goodwill - We can identify it as the business reputation. As the business grows in popularity over the years, and when they acquire other businesses their reputation goes up. If the business reputation on the balance sheet does not change, you can determine that they have not acquired new businesses for over the years.

 

Intangible assets – Intangible assets include assets that cannot be touched by hand. These include copyright, patent, trademarks, franchises, and brand names. For example, the Coca-Cola company brand name is more than 100Bn $. It is because they have spread their brand and become popular all over the world. We can see the same thing applies to apple, tesla, Bank of America, Wal-Mart, McDonald's, and Samsung.

 

Long-term assets - This section includes investments made by the business for more than one year. That is the investments they have made in subsidiaries etc. Looking at these long-term investments, we can understand the vision of the board of directors of the business. You can see if the other businesses they have invested in have a durable competitive advantage, and if the businesses they have invested in for the long term are in the same business field they are currently engaged in.

 

Young growth companies generally maintain a relatively low level of debt in the early stages of the business. As a business grows, they steadily increase its investment in PPE. As a result, businesses reach a stable level of profitability after some time. That is the matured stage. Businesses then distribute most of their profits to shareholders. At that time, both the assets and liabilities of the business are high. Here, the goodwill of mature-stage businesses is very high. The reason for that is that the business has acquired a strong reputation over time by acquiring other businesses since the age of young growth. 

When you study any business, you should cross-check not only the balance sheet but also the income statement and cash flow statement. (You can see the article I wrote on how to study an income statement correctly in the blogger) In addition to the fundamental analysis, when you study a business, pay attention to its company management. In addition to these, there are many more issues, but I have mentioned only a few grants. Stay tuned to the "value stock investor & Fiverr expert" space as more important issues will be discussed in future articles