Assets

I learned how to value companies and build financial modeling from my friend, Felix Hsu. He is my classmate from junior high school and mentor in the financial and business field. I want to share some interesting concepts that we came up with recently.

Firstly, we need to know what is the financial statements (income statement, balance sheet, and cash flow statement). In short, it provides a picture of the performance, financial position, and cash flows of a business. After understanding it, we can do some basic fundamental analysis for companies or ourselves. Here, I want to analyze ourselves by the balance sheet and think of how to improve our assets.

There’s an equation inside the balance sheet, assets = liability + equity = Financial assets (cash + stocks + bonds + deposits) + Operating assets (intangible assets + tangible assets + net working capital)

• Intangible assets = knowledge, social network, reputation, etc
• Tangible assets = car, house, laptop, smartphone, internet, etc
• Net working capital = current assets (expense that has not been paid for the current year)-current liability (expense that has not been paid for the current year, which is without interest such as your water and electricity bills, you pay the bills at the end of the month, not exactly when you use them.)-cash& short-term investment.

The key concept is about how do we use operating assets (intangible assets + tangible assets + net working capital) to generate revenue. Then translate revenue to net income after deducting all the cost. For most young people, they don’t have enough tangible assets. Therefore, the best way to generate revenue is to improve our intangible assets like technical skills, organizational capability, creativity, investment knowledge, social network, and reputation.

Similarly, every company has its intangible assets and tangible assets. We can build a financial model to see how do companies leverage their assets to generate revenue. But this is just one of the approaches to value personal or company’s financial performance. The real world is much more complicated since there are many uncontrollable variables. So we need to do more research about macroeconomics and microeconomics, to predict how market predicts the real/intrinsic value of the company, and at the same time forecast how a real/intrinsic value of the company affects the market.