There are several ways to value a company and determine whether it is likely to be a sound investment. In accounting, there is a current asset formula that is a gauge of a company's financial condition. The term "net current assets" refers to the value of company's total current assets after all of its current liabilities have been subtracted. These are tangible assets that can include cash, inventory and accounts receivable, which is the money owed to a company. Also known as working capital, net current assets are a reflection of company's short-term health on a balance sheet, which is a financial statement filed with the regulatory body in a region.
If net current assets are enough to pay current liabilities, there is a positive working capital ratio. In the event that assets are insufficient to meet short-term debt obligations, creditors will not be paid, and there is negative working capital. If liabilities continue to outweigh assets over a prolonged period of time, it could lead to the company filing for bankruptcy. This scenario could signal that revenues or sales are declining while the accounts receivable component on a balance sheet decreases, which would be a warning sign to investors.
There are various types of current assets that constitute net current assets. They might include cash or other assets that can be liquidated or converted to cash in a relatively short period of time. Features might include assets that can be sold or consumed within a year without interfering with daily business operations. In addition to cash, current assets might include currency and deposit accounts, accounts receivable and short-term securities such as stocks that can be liquidated quickly. Additionally, inventory and pre-paid expenses, including insurance, are all types of current assets.
In addition to repaying short-term debt obligations, a company might use net current assets to fund short-term expansion initiatives or for unplanned expenses. Investments that are less liquid and cannot easily be converted into cash are considered long-term investments. These assets could include real estate, bonds and company equipment. Long-term assets are designed to be held by a company for more than one year.
Economist Benjamin Graham developed a trading strategy tied to purchasing stocks that were trading below the net current asset value. This is based on comparing a stock price to the amount of net current assets. Stocks that are trading significantly below this value could have the potential to be bargain investments.
