How Much is the Business Worth: Stories the Asset Values Tell

In week 4, we had discussed how to value the asset items in the balance sheet. As we have been saying from the second week of this class, the balance sheet of any company tells us about the company.

In this week’s class therefore, we will attempt to tell the story of real companies, listed on the Nigerian Stock Exchange by listening to the figures stated against the asset items. We should always remember that asset items which will appear on the balance sheet will differ from one type of industry to the other.

If the asset items differ from industry to industry, and the value of these items vary from company to company depending on the size, and business model, it is therefore possible to guess what a company does, and how it operates just from looking at the Asset Column, even if you do not know the company.

Why is this important, I hear you ask. It is important when you want to make decisions based on the analysis of the financial statements. If you can read the story the figures tell, then you would be able to make better decisions on acquisition of a business, stocks of a company, or making better planning to drive growth as a manager of a company.

If you do not know what to expect while reviewing a company’s balance sheet, or know what is expected when preparing one for your company, it will be difficult for you to do either.

It’s Story time! Once upon a time…

Story #1

Table 1: Company A – The Asset column from the Balance Sheet for the period ended 31st December, 2019

What business could company A possibly be doing? Three asset items and its values will help us answer that question; Property, plant and equipment, Biological assets and Inventories. What do they say you might be wondering.

Property, plant and equipment are non-current assets (aka Fixed assets), and its high value of N49.08 billion says that the business is capital intensive. Biological asset refers to animal or plant, and we can see that the company has N3.77 billion worth of this asset. This tells us that the company is involved in some sort of agricultural business activity.

But are they farmers only selling their produce, or do they process the farm produce to sell to consumers? We know that farmers who do not process keep little inventory as the farm produce need to be sold immediately to a processing facility, but Company A here keeps a sizeable inventory, which can be interpreted to mean that they also process the agricultural produce.

So, what have we heard from the figures to be the business of the industry? They are into agriculture, and they are also into processing of agriculture produce.

Story #2

Table 2: Company B – The Asset column from the Balance Sheet for the period ended 31st December, 2019

The asset items themselves openly proclaim the nature of business this company is involved in. Can you hear the proclamation?

The company’s cash and balances is with the central bank, it’s biggest asset item of N2.30 trillion is loans and advances, it holds a lot of financial assets; treasury bills and derivative assets, and investment securities.

This company is involved is financial services, and will be nothing other than a Bank. When the asset values are added, it adds up to N6.34 trillion. That tells us that the bank is a very big one, a tier one bank for sure.

Story #3

Table 3: Company C – The Asset column from the Balance Sheet for the period ended 31st December, 2019

This balance sheet tells a different story from the ones we have already seen, what business do you think they are involved in? The Property, plant and equipment (fixed asset) at N31.95 billion speaks to a business requiring significant capital to operate, and the cash availability indicates that it is involved in operations requiring cash flow to run.

Trade and other receivables (Account Receivables) tells us that the company is involved in a very competitive market, hence the need to grant such high credit facility to its customers. Inventory figures further confirms that the company manufactures products.

So, we can say with a high degree of accuracy that the company is involved in manufacturing and in a very competitive market, but we cannot be specific as to the nature of the manufacturing it does.

Story #4

Table 4: Company D – The Asset column from the Balance Sheet for the period ended 31st December, 2019

One look at the figures gives rise to a resounding voice saying; Company D has a fixed asset (property, plant and equipment) worth N1.20 trillion! When you listen to the Inventory figures, there is only one thing you can hear the company does. The company is involved in manufacturing, heavy manufacturing at that.

It can be only an industrial goods manufacturer, and the biggest of this category is the cement manufacturing sub-sector. These numbers tell the story of a big cement manufacturer, when added to industry knowledge in Nigeria, will led you to conclude with some degree of accuracy that the balance sheet will belong to Dangote Cement Plc.

Story #5

Table 5: Company F – The Asset column from the Balance Sheet for the period ended 31st December, 2019

This company has fixed asset synonymous with the other companies we have categorized as manufacturing companies, but the second largest asset item is speaking in a language we did not see with the other manufacturers we have seen so far.

The right to use asset (or lease asset) that is worth N500 billion is a contract that allows the company to use an asset but does not convey ownership rights of that asset, this is presented in the balance sheet under the asset items. Typically, assets that are rented under operating leases include real estate, aircraft, and equipment with long, useful life spans. This tells us that Company F uses a significant amount of leased assets for its business, this practice is not synonymous with manufacturing industries.

Another voice can be heard from the Intangible assets. Intangible assets refer to identifiable non monetary assets which have no physical substance owned or controlled by companies. These assets include patents, non patented technology, trademark, copyright, the right to the use of land etc.

Intangible assets can be found in the balance sheet of manufacturing companies as well as service companies, and given the fact that the rights of use assets is more synonymous with service companies than manufacturers, we would be inclined to categorize company F in the service industry.

How have you found the stories told by the asset figures so far? We should always remember that one asset item may have completely different meaning in different industries. So when all these assets are organized, they will form a living company.

How about doing a little exercise? Listen to the story being told by the figures in the below asset columns, and try identifying the nature of business the company does.

Exercise #1