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18 Financial Statement Analysis

Investing Activities

Investing activities refer to a company’s acquisition and maintenance of investments
for purposes of selling products and providing services, and for the purpose of investing
excess cash. Investments in land, buildings, equipment, legal rights (patents, licenses,
copyrights), inventories, human capital (managers and
Operating and Financing Assets employees), information systems, and similar assets are
40 for the purpose of conducting the company’s business
35 operations. Such assets are called operating assets.
30 Also, companies often temporarily or permanently in-
$ Billions 25 vest excess cash in securities such as other companies’
equity stock, corporate and government bonds, and
20
money market funds. Such assets are called financial
15
10 assets. Colgate’s balance sheet shows its 2006 invest-
5 ment, or asset, base is $9.14 billion, of which $7.13 billion
0 is in operating assets and the rest is in financial assets.
Albertson’s Target Colgate FedEx The chart in the margin shows the operating and finan-
cial assets of selected companies.
Financing assets Operating assets Total
Information on both financing and investing activi-
ties assists us in evaluating business performance. Note
the value of investments always equals the value of financing obtained. Any excess
financing not invested is simply reported as cash (or some other noncash asset).
Companies differ in the amount and composition of their investments. Many companies
demand huge investments in acquiring, developing, and selling their products, while
others require little investment. Size of investment does not necessarily determine com-
pany success. It is the efficiency and effectiveness with which a company carries out its
operations that determine earnings and returns to owners.
Investing decisions involve several factors such as type
Current and Noncurrent Assets of investment necessary (including technological and
labor intensity), amount required, acquisition timing,
40
asset location, and contractual agreement (purchase,
35
rent, and lease). Like financing activities, decisions on
30
investing activities determine a company’s organiza-
$ Billions 20 tional structure (centralized or decentralized), affect
25
growth, and influence riskiness of operations. Invest-
15
ments in short-term assets are called current assets.
10
These assets are expected to be converted to cash in the
5
short term. Investments in long-term assets are called
0
Albertson’s Target Colgate FedEx noncurrent assets. Colgate invests $3.30 billion in cur-
rent assts (36% of total assets) and $2.70 billion in plant
Current assets Noncurrent assets Total and machinery (30% of total assets). Its remaining assets
include other long-term assets and intangibles.

Operating Activities
One of the more important areas in analyzing a company is operating activities.
Operating activities represent the “carrying out” of the business plan given its
financing and investing activities. Operating activities involve at least five possible com-
ponents: research and development, procurement, production, marketing, and
administration. A proper mix of the components of operating activities depends on the