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MENTORING - Fundamentals - Company Analysis - Balance Sheet analysis -…
MENTORING - Fundamentals - Company Analysis - Balance Sheet analysis
Today we are going to discuss Balance Sheet.
In a balance sheet, there are three parts: (1) assets; (2a) liabilities; and (2b) shareholder equity
Liabilities and shareholder equity are both liabilities.
Shareholder equity should always be given back to the owner while the company is closed.
Assets take money out of the company
Liabilities will always bring money into the company
Both assets and liabilities (along with equity) are responsible for revenue and expenses.
Money required (expenses) for assets comes from liabilities (including equity)
The expenses are the reason behind generating revenue.
Assets are two types. Current and long term. Current means assets for withing one year. Long term assets means those beyond one year.
Liabilities are two types. Current liabilities are for short term, within one year. Long term liabilities are those beyond one year.
Long term is also called non-current sometimes.
A company that has to run well is one that has a good control on WORKING CAPITAL
A company, to run well, needs two types of capital. (1) capital expenditure (long term); and (2) working capital (short term).
Working capital (WC) analysis. WC = Current assets - Current liabilities.
Net WC = Net current assets (current assets - cash - investments) - Net current liabilities (NOTHING TO REMOVE)
We will take operating profit from P&L and calculate ROCE (return on capital employed).
ROCE = Operating profit/NWC
If our ROCE is greater than 20-30%, it is bound to be a good company. The higher the better.
If our ROCE is less than 20%, we will be a bit careful. Reject all companies with less than 10% ROCE.
This is how institutions (big boys) are going to analyse fundamentals. Operating leverage and nice ROCE.