Reading the Balance Sheet: Assets
When researching dividend stocks, and determining which are solid picks for your investment portfolio, it can help to understand the balance sheet. Take a look at a company’s balance sheet to get an idea of the financial stability of the company before investing. A company that is financially stable is more likely to be able to raise dividends over time, helping you improve your portfolio over all.
You will look at different items on a balance sheet, including assets, liabilities and shareholder equity. Right now, we will look at assets; next week we will tackle liabilities and shareholder equity. Assets, when considering companies, are used to operate the business.
These are assets that can be converted quickly and easily into cash. For the most part, current assets have a life span of a year or less. Cash is, unsurprisingly, the most popular of current assets. Additionally, there are “cash equivalents,” like U.S. Treasuries, that are considered pretty much as good as cash, and that can be liquidated quickly.
Other types of current assets, though, might be accounts receivable – when clients owe money – as well as inventory. Inventory can include ready-made products that company plans to sell, as well as raw materials that will be used to create products and different items in various stages of manufacture.
Those assets that cannot be turned into cash quickly and easily, and which have a longer lifespan, are called “non-current.” These assets are usually considered long-term and tangible. Machinery the company uses, real estate (warehouse, store or land), and other equipment, such as office equipment like computers, phones and chairs, are considered non-current assets.
However, while many non-current assets are tangible, there are those that are not. Patents and copyrights are considered non-current assets. The value of such intellectual property can be incalculable, and should be considered as you estimate the value of a company.
Another consideration is the depreciation of assets over time. During the useful life of an asset, it slowly loses some of its value. It is important to factor in the economic cost of the declining value of assets as you consider company. On the balance sheet, depreciation is deducted from the assets as part of the process of figuring value.
In the end, you need to understand what the company has that is of value. You want to choose dividend stocks that will remain solid over time, and possible show a tendency to grow. A number of assets can prove that the company has sufficient items of value to remain in business – and possibly even grow.