This article is the third week’s lesson in the ModernGraham Academy beginner’s course, An Introduction the the Balance Sheet. The ModernGraham Academy is a place to learn about the basics of investing, with an emphasis on the ModernGraham approach.
This course will be a detailed look at the balance sheet, starting with a basic overview, then a look at each part of the statement individually, and finishing up with a review and some final comments.
An assignment is given each week; if the assignment is completed before the next week’s lesson and emailed to ben AT moderngraham.com (replace the “AT” with @), feedback will be provided.
What are Non-Current Assets?
Non-current assets are the assets a company holds that are not liquid. These assets are the brick-and-mortar of the company. Without them, the company could not produce income.
Here are some of the main types of non-current assets, and some things to consider about each type.
- Property, Plant, and Equipment – This asset is fairly self explanatory. It is the physical items a company could own, from real estate to pens and pencils. Often this is one area where you can see potential for growth. Over time as a company accumulates more property, plant, and equipment assets, there is potential for growth – provided they are using the assets effectively.
- Goodwill and Intangible Assets – The intelligent investor will be wary of assets in this category. Patents, Trademarks, and other intellectual property fall under this area. While there is certainly a value to such assets and they should be included in an analysis of the company, often the value is overstated. As a result, it may be best to keep intangible assets out of any balance sheet valuation altogether.
- Long-term Investments – Long-term investments differ from the current asset short-term investments in that these are investments that the company intends to keep. These could include equity positions in other companies, investments in real estate (that is, real estate not used for the company’s operations, which would be included under property, plant, and equipment), and long-term bond investments, among other things. Long-term investments can be good for a company if they are strategic and helpful to the company’s long-term goal.
Homework
This week, please discuss the following question with a one paragraph response in a comment to this post:Â How can a large amount of intangible assets, be good or bad for a company?
An Introduction to the Balance Sheet Course Overview
- Week 1: What is it, Why is it important, and Where can it be found?
- Week 2: Current Assets
- Week 3: Non-current Assets
- Week 4: Current Liabilities
- Week 5: Non-current Liabilities
- Week 6: Equity
- Week 7: Key Issues and Review
- Week 8: Final Comments
Photo provided by iBoy_Daniel
Intangible assets can be defined as 1) Legal intangibles, such as trade secrets, copyrights, patents, trademarks, 2) Competitive intangibles, such as knowledge activities, collaboration activities, leverage activities, and structural activities, and 3) Goodwill, which comes into play after an acquisition, and represents the amount of money a company has paid over book value to acquire another company. (You may want to look at Purchase and Pooling accounting for acquisitions – Pooling is no longer allowed)
Intangible assets should allow their owners to recognize above average profits. If intangible assets are large and the return on equity is low, you can assume that the managment has made bad decisions in the past. If the company has large intangible assets and a high consistant ROE, then you can thank the trade secrets, copyrights, patents, trademarks, knowledge activities, collaboration activities, leverage activities, and structural activities for providing those above average profits.
A large amount of intangible assets can be good for a company because they can increase the value of other assets and they can’t be destroyed by accidents or natural disasters. On the other hand, a large amount of intangible assets could have an impact the company’s net tangible assets (Assets – Liability – Stockholders’ equity), especially if the intangible assets are overvalued.
In general, investors should prefer to see lower intangible assets on the balance sheet because of the dangers of overstating the value. If the balance sheet reflects a low level of intangible assets, it is better than the alternative, because there may be more chance of the company being worth more than expected.
Iintangible assets are bad if the number is large comparatively with the more easily valued assets. If the company has large numbers in all non-current categories, it could be very good for that comapany. However, this question seems very sector dependent. If a tech or biotech company doesn’t have a large number of intangible assets, then it could appear its growing days are over. Intangibles assets are the lifeblood to such sectors; however, in other sectors like basic materials or energy, a large number of intangible assets compared to property, plant and equipment or longterm investments would be alarming. Sure one would want companies in these sectors to be inovative and have patents, but investors would rather see high producing acreage or holdings of long dated futures and other derivitives for hedging. if their balance sheets are overweight intangible assets, then it might inflate share holder’s equitity or at least put it into queation. It seems that whether intangibles are good or bad depends a lot on the sector and the nature of business.