Understanding Assets
Assets are resources owned by a business that generate future economic benefits.
- Current Assets: Cash, accounts receivable, and inventory convertible to cash within a year.
- Fixed Assets: Long-term items like property, plant, and equipment.
- Intangible Assets: Non-physical assets such as patents, trademarks, or goodwill.
Growth in assets by acquiring productive resources like equipment or technology can boost revenue and market competitiveness. However, holding overvalued or obsolete assets can inflate the balance sheet and hurt earning potential.
Understanding Liabilities
Liabilities represent a company’s financial obligations owed to lenders, suppliers, or creditors.
- Short-Term Liabilities: Payable within one year, such as accounts payable and short-term loans.
- Long-Term Liabilities: Due after one year, like bonds and long-term leases.
While debt can fund growth, excessive liabilities increase interest costs and default risk. The debt-to-equity ratio measures leverage; a high ratio means higher financial risk and may deter investors.
