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amaruny55 · May 5, 2009, 11:58 AM

What does it indicate when the total assets on a balance sheet from one year increases on the balance sheet for the next year? Is this good?

Ginger2345 · May 5, 2009, 02:33 PM

basically, more assets = more stuff (thats good). An increase in assets means that something of value has been acquired, it could be: cash, property, equiptment, accounts recievable (what people are going to pay you), and the like.

morgaine300 · May 5, 2009, 09:47 PM

I would say it's not necessarily "good." While that might be the easy assumption, there are situations where it would not be good. Those assets have to be financed somehow - an increase in assets is going to be balanced out with an increase in debt and/or equity. (Granted, the increase in equity might be retained earnings.)

So just as example, if they were financed with debt, they now have a bigger debt to pay. Can they afford it and pay for it? Are the assets worth anything? They may have "value" on the books, but for assets to truly be worth something, they have to be earning something for the company. (Either by working for the company, i.e. a machine that makes something so they can sell it, or investments that earn returns, or whatever.) So are the assets truly worth something to the company? i.e. can they utilize them and get a worthy return on them?

Companies can also grow too quickly, so a lot of increase in one year might not be good from that point of view. Can they handle the growth? And can their cash flow keep up?

Even if those assets were financed with stock, those stockholders are going to want a return. Can the company provide one?

Of course, maybe the answer to all of the above is a big yes. Maybe they're doing very well and just growing at a nice pace. And they can still give their stockholders a return and pay their debts, and those assets are exactly what they need to help them grow. Or maybe they've had some good income and are putting some of that to work by putting it back into the company for growth.

The point is, numbers in and of themselves don't tell the whole story. Just seeing bigger asset numbers doesn't tell us the whole story and we can't *assume* there's a good thing going on without knowing other stuff.

Sorry - if that was for a class, that may have been a bit on the complicated side. But then, I hate when classes try to get you to answer questions like that based on too little information when in reality it can't be answered.