Act 1 of the financial statements was the Income Statement. Yesterday we looked at the Cash Flow Statement. Today  Act Three of the financial statements: the Balance Sheet.

We continue with VXGN, a Net Net stock, who derives most of its value from its assets.

If you are interested in Asset valuations for a company or Net Net stocks this is your arena. The Balance Sheet of a company is where you figure out where the assets are and the liabilities are hiding in a company. The assets can be anything that has value from Cash to the inventories of a  business. The liabilities can be everything from short term notes to Long Term Debt.

This is not a full balance sheet from a companies 10Q. This is a simplified version of the balance sheet history that Morningstar provides for free.

The Balance sheet begins with Assets. And within assets it commences with current assets. Technically current assets are assets that are convertable in the short term, or less than a year.

Line 1 Cash and Equiv. This means Cash in the bank  and securities that trade like cash.

Line 2 Short Term Investments. Investments that can be sold in under a year. I once invested in a net net company that had listed the bulk of its assets as short term  securities. I jumped in and bought before I had finished reading the full 10k. When I reviewed the 10k I discovered that in fact the value company was almost all in illiquid, not trading securities. They should have been classified as long term assets, but I guess this is really a management story. And my stupidity for not reading the actual financial reports before making an investment decision. Be Patient.

Balance Sheet History for Beginners from Morningstar

Line 3 Accts Rec. – Account Receivables. This is money the company expects to collect on soon.

Line 4 Inventory. If the company produces lemonade. Inventory is lemonade. Some inventory is easily convertable to cash. Some can be thrown into a dumpster after not too long. When valuing a company through its assets be sure you understand the differnence.

Line 5 Other Current Assets. Other crap that, if the company is being honest, could be sold in less than a year.

Line 6 Total Current Assets. Total lines 1-5 and you have the Current Assets. This is the big number for Net Net stocks. Whatever this number is needs to be able to pay off all the debts (liabilities) with plenty left over. We will discuss various valuation schemes in another post.

The next section is Long Term Assets. That is assets that would take longer than a year to dispose of.

Line 7 Net PP&E. Property, Plant & Equipment. This is what you think it is. The land, buildings, and other big ticket items.

Line 8 Intangibles- This is a mildly controversial asset. Some people exclude it when valuing assets. It is how companies account for the value of a brand name like McDonalds. which has some brand value in the right circles. Mostly the ripple crowd.

Line 9 Other Long-Term Assets. This can be long term securities or assets that will take some time to recover full value on.

Line 10 Total Assets. This combines Line 6 Current Assets with  Lines 7-9. This is all the assets a company has.

Next we move to Liabilities and Stockholders Equity. And again we begin with Current Expenses or Current Liabilities.

Line 11 Accts. Payable. Accounts Payable. This is where the company has taken delivery of say a new Plasma tv, but haven’t gotten around to pay for it yet. Money owed on something you have. But because it is a current liability the company expects to pay it in the next year.

Line 12 Taxes Payable. Taxes the company knows it owes, but hasn’t gotten around to yet.

Line 13 Accrued Liabilities. A company for example, might know that you worked this week, but the financial reporting will not come until next week. If your pay check is due after the financial reporting it could be reported as an accrued liability. Money the company owes in the short term for a service or wages that is has not paid for yet.

Line 14 Other Short Term Liabilities. Debt or other obligations that a company that are due in less than a year and don’t fit in the other categories.

Line 15 Total Current Liabilities. Total lines 11-14 and you get current liabilities.

Line 16 Long Term Debt. I think that says all it needs to.

Line 17 Other long term liabilites. All non debt expenses that will take longer than a year for a company to settle out.

Line 18 Total Liabilities. Take line 15 and add lines 16 and 17 to it. In a net net stock, the current assets must cover this amount with room to spare.

Line 19 Total Equity. Take Total Assets and subtract total liabilities and you have this number.

Line 20 Total Liabilites and Equity. Add line 18 and line 19. For what reason would you do this I am not sure. But here it is on the balanace sheet.

Now that we have walked through the Financial Statements we have to sort out what it all means for you, the beginning investor. Is there anyone else out there?

The sound of crickets chirping is the only response.

Leave a Reply