In the last blog, we took the first few steps in learning how to read a balance sheet. Here’s a recap of what we did last time. We asked the following four questions:
- How much money have the owners put in my company?
- Where was the money put?
- Can I recreate the same assets using the original money?
- Where do I find all this information?
Today, let us use HUL as a practical example to see how to take the process ahead.
5. Kabhi Gadhe ke Upar Naav, Kabhi Naav ke Upar Gadha. Ask, “Do shareholders always have to put their own money to run a business?”
Clue: Click on the picture to enlarge it. Look at the red box. Those numbers are called working capital.
Current assets are required to run the everyday business. It includes readily available cash, raw materials, credit given to buyers and so on.
Some of this is financed by current liabilities, such as the credit received from suppliers. Usually, however, current liabilities fall short. And the shortfall must be coughed up by the owners.
This shortfall, by the way, is called working capital. When the working capital is a positive number, it means owners have to provide it.
Here’s the amazing thing: HUL’s balance sheet shows huge negative working capital!
And why has the amount gone up by six times in the last ten years?
Is it a good thing for you as a value investor?
Reading balance sheets is fun.
Until next time then,
Happy Value Investing!
Flickr Creative Commons Image via El Bibliomata