Current assets in financial statements: What types are there and how should they be viewed

For investors focused on value analysis, reading financial statements is a crucial starting point in assessing a company’s strength. One often overlooked aspect is the study of assets listed on the balance sheet, especially the current assets that a company can convert into cash in the short term. This is a key indicator of the company’s survival when facing unforeseen circumstances.

Current Assets: Meaning and Difference from Other Assets

Current assets (Current Asset) are items that a company holds and can convert back into cash within one year. This important component appears on the company’s balance sheet and indicates whether, in the event of financial distress, the company has enough resources to mobilize.

The difference between current assets and (Noncurrent Asset) assets is clear in terms of ease of conversion to cash:

• Current assets reflect the ability to manage short-term crises, with examples such as cash, bank deposits, short-term investments, and inventories that can be sold relatively quickly.

• Noncurrent assets are long-term resources maintained for ongoing operations, such as land, buildings, and machinery, which cannot be sold rapidly.

Main Components of Current Assets: What Are They?

Understanding what constitutes current assets is essential for analyzing their quality:

Cash ( and Cash Equivalents

Cash is the most liquid asset but yields no return as it remains idle. Bank deposits and short-term securities )Cash Equivalents( are equivalent to cash and can be quickly converted back, providing interest income.

)Short-term Investments###

Companies may invest in securities such as stocks, gold, or bonds with less than a year’s maturity to make idle cash work, generating some returns. The downside is the risk of loss from price fluctuations.

(Notes Receivable) and Accounts Receivable ###Receivable(

When a company sells products or services, it often receives a promissory note from the customer that has not yet been paid. This indicates assets expected from customers in the future but carries the risk that customers may default.

)Inventory(

This includes raw materials, work-in-progress, and finished goods ready for sale. This figure is significant in wholesale and retail businesses and should be monitored for how quickly inventory turns over. Excess inventory not only incurs sunk costs but may also indicate sales problems.

)Unearned Revenue and Prepaid Expenses###

This section shows money the company expects to receive in the near future and payments made in advance for benefits to be received later.

Asset Quality: What Matters?

Not all current assets are equal. A common oversight by many investors is that numbers may look good but quality is poor, such as:

• Cash, which is highly secure and immediately usable.

• Receivables (Receivable), which could become dead assets if customers cannot pay during a crisis.

• Inventory, which needs to be sold before it becomes cash. If not, it may be obsolete or outdated.

Therefore, the composition of current assets is just as important as their size.

How to Read Current Assets: What Should Investors Ask Themselves?

When examining the balance sheet, consider:

1. What is the total amount of current assets compared to short-term liabilities? This ratio ###Current Ratio( indicates how many times the company’s current assets can cover its upcoming liabilities.

2. What percentage of current assets is cash and cash equivalents? A high proportion indicates safety in facing crises.

3. Are receivables increasing or decreasing? A significant increase may signal collection issues.

4. How are inventories changing? Unusual buildup could be a warning sign.

Case Study: Apple During the COVID-19 Crisis

Apple )APPL( serves as a good case for analyzing current assets. In early 2020, when COVID-19 first erupted, CEO Tim Cook stated that liquidity was not a problem for the company.

Looking at the 2019 financial statements, Apple reported current assets of $162.819 billion, with cash and cash equivalents )Cash & Cash Equivalents( at ) billion.

What happened in the following year, (2020)?

Cash and equivalents decreased significantly: from $59 billion to ( billion, a 46% reduction. But this isn’t necessarily bad, as it shows Apple used cash to fund operations.

What changed: Receivables )Receivable$90 increased from $48 billion to ( billion, a 62.7% rise.

This is a deep signal: the company is giving customers more time to pay, possibly because customers are facing liquidity issues or because the company has altered its sales policies. Investors need to monitor this trend to understand whether these receivables will turn into cash.

Conclusion: Make Smarter Investment Decisions

Current assets are not just about quantity but also quality and composition. When investing, analyze what these assets are, how each component impacts the company’s short-term survival, and how they are likely to change over time.

This approach to reading financial statements helps investors answer key questions: How resilient is the company I am investing in against crises? And that determines whether an investment is wise or risky.