Analysis of Working Capital Assets: Approaches to Assessing the Financial Health of a Company

Financial Statement(Financial Statement) is a crucial dimension that helps management and stakeholders understand the company’s potential and risks. Financial statements consist of many complex components, and in this article, we will focus specifically on Current Assets, which are key indicators of the company’s ability to withstand cash shortages.

What are Current Assets: Meaning and Role

Current Assets(Current Asset) are assets that an organization can convert into cash within 12 months, reflecting the short-term liquidity of the entity. When the economy faces a crisis or financial distress, these assets become vital tools that help the organization survive. A higher amount of current assets indicates that the company has a strong financial cushion and flexibility.

Assets are categorized into two main groups appearing on the (Balance Sheet):

• Current Assets - Can be converted into cash within no more than 1 year, such as cash and cash equivalents, short-term securities, trade receivables, inventory, and prepaid expenses.

• Non-current Assets - Are assets with a lifespan longer than 1 year and involve more complexity in conversion to cash, such as land, buildings, machinery, and long-term investments. Non-current assets play a significant role in long-term operations but are less flexible during crises.

Components of Current Assets: Types and Characteristics

Assets that can be converted into cash in the short term are divided into several types:

Cash & Cash Equivalents (

Cash is the most liquid asset, widely accepted, and can be used immediately to cover losses. However, holding too much cash is not necessarily a smart investment because cash does not generate returns. Bank deposits and long-term loans are balanced options, with risks from banks but with the benefit of ultimate security.

) Short-Term Investments ###

Short-term investments serve as medium-term reserves, less than 1 year, and can be easily liquidated. Examples include stocks, gold, and debt securities. While these investments involve risks, they can generate additional income.

( Notes Receivable )

Short-term notes receivable, with maturities under 12 months, come in various forms such as loan documents and trade agreements. They may carry default risk but offer benefits through interest income.

Receivables (

Refers to outstanding amounts owed by buyers and others. This is usually necessary for smooth operations but carries the risk of non-payment in emergencies. Weak or unreliable debtors may fail to settle their dues.

) Inventory ###

Refers to raw materials and finished goods in stock. These items will generate revenue upon sale or become future cost of goods sold. Analysts need to verify whether there is sufficient usage or if they become obsolete, turning into sunk costs.

( Supplies )

Refers to consumable materials such as office supplies, which are used up and completed.

Accrued Revenue & Prepaid Expenses (

These are revenues not yet received but likely to be collected, and expenses paid in advance that will benefit future periods.

Reading Current Assets: In-Depth Financial Data

The current asset account on the )Balance Sheet### is vital for analysts to understand. It indicates the company’s stability and resilience to obstacles. Analysts will see how much current assets the organization holds and how they can be used to secure funding or support ongoing operations during a crisis.

Furthermore, the types of current assets reveal the company’s efforts to convert assets into cash. For example, cash and deposits are highly liquid, but trade receivables may pose risks during crises due to creditworthiness issues. Therefore, assets that can be reliably converted into cash even in tough times are considered higher quality and are key points for management to analyze more deeply.

Case Study: Apple Inc. and Current Assets

Apple (AAPL) is regarded as a financially prosperous company, with the highest market value in the US stock market. Tim Cook, the company’s experienced executive, announced that sufficient capital is not a concern for Apple.

At the end of 2019, Apple’s total current assets amounted to $162,819 million. Cash and cash equivalents were highly favored ###Cash & Cash Equivalents( at ) billion dollars. Looking at the changes between 2019 and 2020:

• Total current assets decreased from ( billion to ) billion dollars, reflecting a short-term price reduction (Short-Term Price Drop)
• Cash and cash equivalents decreased from ( billion to ) billion dollars, down 46% $59 46% decrease$143
• However, trade receivables $135 Receivables( increased from ) billion to $90 billion dollars, up by 62.7% $48 62.7% increase(

These changes may reflect adjustments in collection policies or indicate weakened ability to collect from counterparties during crises.

Summary

Current Assets are a key indicator for those seeking to understand a company’s financial health. These figures help analysts estimate how well the organization can manage short-term crises and overall strength. However, numbers alone are not sufficient; management must analyze the structure of current assets, their quality, and how effectively they can be converted into cash even during tough times. The relationship between current assets and Non-current Assets also provides deeper insight into the company’s financial balance.