Financial Knowledge: Walking into the Balance Sheet (Part 2)

1、 Regarding operational risks

The so-called operational risk refers to the uncertainty of future profits caused by business decisions such as strategic choices and sales strategies. Although business risk involves various aspects of enterprise operation, its business style can be seen from the balance sheet.

Generally speaking, a company with a more aggressive style will make long-term equity investments through continuous mergers and acquisitions; A company with a more conservative style will focus on its areas of expertise and less on other areas of business.

Investors can have a comprehensive understanding of the company's operations and operating style based on the balance sheet, combined with the information disclosure in the company's annual report, such as business performance, major mergers and acquisitions or business disposals.

For companies with more aggressive styles, investors can further judge the management's expectations for investment projects based on the funding sources of their project investments. If financing is mainly through borrowing, it means that the expected investment return rate of the enterprise's project will be higher than the debt interest rate. At this point, investors can then pay attention to the liquidity risk of the enterprise; If the enterprise mainly raises funds through equity transfer, it may be that the management's expected return on the project in the short term is not high, and the investment is more strategic considerations.

In addition, if the acquired business is unrelated to the main business of the enterprise itself, investors also need to consider whether the enterprise has the ability to integrate the business of the acquired project, which is a key factor in whether the acquired business can further achieve value growth in listed companies. Investors can review the resumes of senior executives disclosed in the annual report to make a preliminary judgment on whether they have relevant industry experience and the ability to effectively integrate their business.

2、 About Sustainable Growth Capability

The sustained growth ability of a company is not only influenced by its asset operation and management capabilities, but also by its industry and industry status.

Although the balance sheet is only a display of the company's operating results, by comparing some key financial indicators with companies in the same industry, as well as comparing and analyzing different industries in the same industry chain, investors can make preliminary judgments about the company's industry status and prospects, and then judge the company's sustained growth ability.

oneAccounts receivable turnover days

The turnover days of accounts receivable directly reflect the time required for enterprise payment collection. In comparison with other industries in the same industry chain, if the accounts receivable turnover days of the entire industry where the invested enterprise is located are relatively low, it may indicate that the industry is in a core position in the industry chain, with fast payment recovery speed and strong bargaining power towards downstream customers. In the foreseeable future, the possibility of maintaining sustained growth ability is high; Similarly, in the comparison of enterprises in the same industry, if the number of days of turnover of accounts receivable of the invested enterprise is significantly higher than the average level of the same industry, it means that the enterprise is small in the industry and has weak bargaining power, which leads to excessive accumulation of working capital in accounts receivable, which reduces the capital turnover and profitability of the enterprise, and the ability of sustainable growth may be weak.

twoInventory turnover days

Inventory turnover days are an indicator reflecting the liquidity of inventory turnover. The lower the turnover days, the faster the turnover and the stronger the liquidity. Inventory turnover days vary greatly among different industries and are more suitable for comparison within the same industry. If the invested enterprise is significantly lower than the industry average, it may indicate that its profitability is at the back end of the industry and its sustained growth ability may be weak.

threeAmount of non current assets

Industry barriers can also affect a company's sustained growth ability. The higher the industry barrier, the higher the likelihood of a company obtaining sustained and stable growth ability. The main factors affecting industry barriers generally include the financial needs and technological capabilities to enter the industry, which are reflected in fixed assets and intangible assets on the balance sheet. Generally speaking, the higher the amount of these non current assets, the higher the industry barrier. The likelihood of new entrants quickly entering the market and seizing market share is lower, and the stronger the sustained and stable growth ability of enterprises in the industry. However, this does not mean that enterprises with higher long-term asset amounts have lower risks. These enterprises with high amounts of non current assets will have more difficulties in business transformation, and the subsequent depreciation, amortization, and maintenance costs of existing assets are relatively high. Once the market size of existing products shrinks, it will be difficult to ensure corporate profits.

In summary, from the perspective of the balance sheet, investors only need to make preliminary judgments on the liquidity risk, operational risk, and sustained growth ability of the enterprise through some simple data analysis. In the future, we will further introduce how to further understand the enterprise through other financial statements.