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Two Questions You Should Ask When Looking At A Company’s Assets

question-markReading through annual reports is an essential part of understanding the business of any company. It can be daunting to sift through the entire annual report. Simplistically, there are two questions that we need to answer when we review a company’s annual report, especially its assets.

Are the assets valuable to the company?

Typically, a company would have to invest in assets which will helps the company to earn a return on its investment. Therefore when looking at the company’s balance sheet, we need to know how valuable these assets are to the firm and how they contribute to the firm’s profitability. A company like Global Logistic Properties (SGX: MC0) has a huge non-current asset in relation to its current asset. This shows that the company makes large investments in long-term assets such as warehouses, and has a lower working capital for the business in comparison. However, company such as Noble Group (SGX: N21) on the other hand, has a much larger current assets compared to its non-current assets. As a global trader of commodities such as Noble requires huge working capital as it moves its products throughout the world. It needs to be flexible in its distribution operations and leases long term assets instead of purchasing them.

How did the company purchase these assets?

A balance sheet needs to be balanced. Therefore we should not only look at just the asset side of things, but also focus on the liabilities. It is important to find out how a company finances its assets. Does it pay it with internal cash, by taking up more debt or why issuing more shares?

Companies such as Singtel (SGX: Z74) that is free cash flow generative might be able to finance most of its investment with its internal generated cash. However, listed trusts such as business trusts or REITs has to distribute as least 90% of its distributable income back to unitholders, leaving little for future expansion. Therefore, we can observe very frequently when a REIT needs to acquire new assets, it will need to raise more funds through a combination of debt and equity. In such cases, an investor will need to find out if the assets are valuable enough to justify using external funds to purchase them.