Premium Essay

Advantages And Disadvantages Of Assets

Submitted By
Words 2145
Pages 9
Assets - Anything which is considered as capable of being owned and controlled by a company or anyone for benefit then that is known as assets. For example - if you buy a table for your office then that will be your asset.
The most important assets for any company are cash or money - if a company is out of cash then they will be bankrupt. Whenever customer buys some goods and they don’t pay bills means they owe you, these are short term assets. These are regarded as intangible assets. Inventory, properties like land, buildings, equipment which are used in company are known as tangible assets. Assets are always classified according to their life span or liquidity. Current asset is anything which is consumed or sold for longer time, typically
…show more content…
Plus, you share the risks and liabilities of company ownership with the new investors. Since you don't have to make debt payments, you can use the cash flow generated to further grow the company or to diversify into other areas. Maintaining a low debt-to-equity ratio also puts you in a better position to get a loan in the future when needed.
Equity Disadvantages
By taking on equity investment, you give up partial ownership and, in turn, some level of decision-making authority over your business. Large equity investors often insist on placing representatives on company boards or in executive positions. If your business takes off, you have to share a portion of your earnings with the equity investor. Over time, distribution of profits to other owners may exceed what you would have repaid on a loan.
These are basic terms which are related to Debt to Equity ratio.
How to calculate debt/equity ratio
Definition
The debt-to-equity ratio (debt/equity ratio, D/E) is a financial ratio indicating the relative proportion of entity's equity and debt used to finance an entity's assets. This ratio is also known as financial
…show more content…
If the debt cost outweighs the returns that the company generates from the debt finance through investments and businesses then it may lead to credit downgrades or bankruptcy. In such scenarios the shareholders are left with nothing.
The cost of borrowed funds differs depending upon the industry and thus there is no single value which can be considered as a high debt-to-equity ratio.
For example, the financial industry has a very high debt-to-equity ratio, approximately above 2.The reason being that financial institutions, banks etc borrow money to lend money. Also Capital-intensive industries have a very high debt-to-equity ratio because of the fact that they have to purchase more properties, plants, equipments to operate etc as compared to the low-capital industries. Some of the capital-intensive industries are namely services, utilities, industrial goods sector, auto manufacturing etc.
As a result, investors should compare similar companies and the industry as a whole to decide whether the debt-to-equity ratio of that certain company is high or low.
As a result, investors must look at a company's historical debt-to-equity ratio figures to determine if there have been significant changes that could indicate a red flag
Low debt-to-equity

Similar Documents

Premium Essay

Real Asset vs Financial Assets

...:INVESTMENT ALTERNATIVES * Types of assets that investors can invest in; financial assets and real assets * * Financial assets: are claims that organizations sell in order to finance their financial needs. Examples of financial assets are shares, bonds, certificate of deposits, unit trust. * Real assets: consists of tangible assets such as investment in real property, precious metal, gems, antiques, stamps, coins and work of arts. Real Asset vs Financial Assets Types | REAL ASSETS | FINANCIAL ASSET | Characteristics | Tangible asset/physical capital that generate income | Claims of organization sell in order to finance their financial needs t | Advantages | * It can be used to produce goods and service s * Owning a real tangible asset that has both investment and aesthetic value | * It has an efficient market for trading * High liquidity * Easy to transfer ownership | Disadvantage | * Lack of an efficient and limited market * Hard liquidate * High commission charged | * Must go through broker (middleman) to get access into the market | Example | * Real property ( house, land, machine, gold, antiques) | * Shares, bonds, certificate of deposit ,unit trust, commodity, derivative instruments | Savings * Form of fixed investment where principal amount and terminal amount is known. ADVANTAGES | DISADVANTAGES | * Provide security * Earn interest on savings * High liquidity | * Earn low income * Hard......

Words: 515 - Pages: 3

Premium Essay

Unit 2

...help Cameron Balloon expand and how they could expand their business, also where they could access funds, internally or externally. Scenario | Source of finance | Explain | Internal or external | 2 Advantages | 2 disadvantages | New factory premises | Mortgage | A mortgage is loan which is given by the bank to the person who seeks it. To claim the loan the seeker must agree with the terms and conditions, and agree that if they fail to return the payments then their personal properties would be at risk of being taken. | This is external source of finance because you are borrowing money from the bank which is external as you are accossiating with someone from outside of your business. | An advantage of a mortgage would be that since you could take out a loan and you wouldn’t need to pay up to 25 years, which is good because it means you could take your time to pay and pay in different amounts depending on the amount you have. Another advantage would be that when you take out a loan it has a low interest rate which means the business wouldn’t need to pay much money back. | A disadvantage would be that if the debtor doesn’t pay back the mortgage within the given time period, the bank would have the right to take over their property, as it is by the law. Another disadvantage is that the interest rates could raise any time which means business may unexpectedly have to pay more. | Repair the existing factory premises and convert the old storage area into a workshop area......

Words: 1375 - Pages: 6

Premium Essay

Sources of Finance

...................................................................................i 1. Motor Vehicle............................................................................................................................................1 2.2 Type of Asset and cost...............................................................................................................................2 2.3 Vehicle purchase options...........................................................................................................................2 -Chattel mortgage.......................................................................................................................................2 -Leasing.......................................................................................................................................................2 -Venture capital..........................................................................................................................................2 2. Soap............................................................................................................................................................3 2.1 Type of asset and cost................................................................................................................................3 2.2 Soap purchase options...............................................................................................

Words: 2991 - Pages: 12

Premium Essay

Small Business Finance

...member or friend, where length of loan, interest rate on loan and any other terms of the loan must be negotiated between parties. Advantages of a loan from family/friends is lower interest rates and more flexible repayment terms. Disadvantages of a loan from family/friends is lack of clarity with amount borrowed (the interest rate and the required payment terms) and also borrowing from friends and family can fracture relationships on a personal level Suitability Good Long or Short term finance option as terms of loan are decided between parties Interest rates are decided by parties Could be suitable source for Douglas Pty Ltd if family or friends have suitable amount of money for business and terms can be decided without affecting relationship. Bank Overdraft: Loan made by a bank in which the customer can withdraw more money from his or her bank account than has been deposited in the account. Advantages of bank overdraft is that it is a quick and flexible source of finance. They are easy and quick to arrange, with little fuss and It allows you to make essential payments when you need to borrow money. Disadvantages of bank overdraft are the costs as overdrafts carry interest (often at much higher than loans), Recall, the bank can recall the entire overdraft at any time. Security for overdrafts may need to be secured against your business assets, which put them at risk if you cannot meet repayments. Suitability Suitable for short term finance to pay back small......

Words: 1224 - Pages: 5

Premium Essay

Capital Structure

...process of financial planning used to estimate asset investment requirements for a corporation. Explain the concept of working capital management. Identify and briefly describe several financial instruments that are used as marketable securities to park excess cash. A corporation having a financial plan in place to estimate its assets investment requirement is important. It’s important because their assets can be used as an advantage for securing loans and can be used to calculate their ability to repay debts. A corporation’s sales are a key compelling force of future asset requirements. As sales steadily increase it creates a need for increase in assets. In other words, asset needs have a propensity to stem from sales increases. For example, if you were to estimate that sales for a corporation will be $40million for a given year, and it is know that in that specific industry that assets have a propensity to be about 40% of sales, then you could estimate that the corporation’s asset requirement will be $16million (40% x $40,000,000). Another good way to estimate asset requirements is to use the percentage-of-sales technique, which is a technique use for forecasting financial data. “Working capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such as cash, marketable securities, debtors, and inventories (Sabharwal, 2009).” Working capital is the remaining of current assets less current liabilities. It is the funds......

Words: 988 - Pages: 4

Premium Essay

Sources of Finance and Their Advantages

...Sources of Finance and Their Advantages & Disadvantages Rob Jennings http://smallbusiness.chron.com/sources-finance-advantages-disadvantages-14407.html Personal Savings and Assets Your personal savings and other assets make a great source of capital. Because you already have them, acquisition costs are minimal, and you won't be paying interest on a bank loan or sharing returns with investors. The drawbacks, of course, are that if you plow your personal savings into a business venture, you could lose it all. Some assets, such as retirement accounts, are safe from creditors and bankruptcy courts; placing such assets at risk may not be good for you, especially if you're approaching retirement age and are running out of time to rebuild depleted accounts. Investors Corralling a group of investors can help you raise start up or expansion capital for your business without placing all of the risk of loss on you alone. These investors may be active partners in the business, or they may be silent investors who simply provide capital and wait for their returns. The disadvantage to bringing in investors is that you do give up a certain element of control over the company. Even if you retain a majority interest, you'll need to keep your investors happy. Additionally, if you share the risk with others, you'll also have to share the profits. Bank Loans William Thayer http://smallbusiness.chron.com/advantages-amp-disadvantages-bank-loans-47377.html Private Banks can be......

Words: 1499 - Pages: 6

Premium Essay

Legal Issues in Business Org

...Various legal structures are available to assist business owners with the organization of their business. These legal structures make provisions for the business’ liability, income taxes, continuity, control, profit retention, and regulatory requirements. Each organizational structure differs and possesses advantages and disadvantages. The first important decision that a business owner will make is selecting an organizational structure that will capitalize advantages and curtail disadvantages for their business. Legal Issues in Business Organizations Sole Proprietorship A sole proprietorship consists of one individual doing business and is the most common and simplest form of business to establish. · Liability: Sole proprietors have unlimited liability, which is a clear disadvantage. They are personally responsible for the obligations of the business, including the actions of employees representing the business. · Income Taxes: A sole proprietorship is not a taxable entity and has the advantage of not having any corporate income taxes. The income is reported on the proprietor’s tax return. · Continuity: A sole proprietorship tends to have limited life, another disadvantage. For instance, if the proprietor dies, the business tends to die as well. Also, if the proprietor brings someone in to help manage or add capital the...

Words: 2373 - Pages: 10

Premium Essay

Lit1 Task1

...today. · Liability: This is one of the largest disadvantages of a sole proprietorship. There is no distinction made under law between the proprietor and the proprietorship therefore the proprietor is one hundred percent liable. In the event that the business flops or is sued the business and personal assets of the proprietor including homes, bank accounts, vehicles, and equipment will be used to pay off outstanding debts. Future earnings are included the only income that is exempt from liability are life insurance monies left by the proprietor to his/her family. · Income taxes: There is no difference under the law between a sole proprietor and the sole proprietorship, meaning that all business income is considered personal income of the proprietor. There is no double tax; all taxes are paid once by the proprietor since there is no separate reporting of federal income tax. The disadvantage to the tax situation is that the proprietors’ income from the proprietorship may cause the individual to enter a higher tax bracket and therefore pay more taxes. However a sole proprietor may decrease taxable income by writing off operating costs as expenses and most often this tax situation is advantageous. · Longevity/Continuity: It is as easy to dissolve the business as it was to start, all the owner needs to do is finish any contracts, pay any outstanding debts and take on no further business. The ease of dissolution can be an advantage, however if the sole proprietor dies the......

Words: 3432 - Pages: 14

Premium Essay

Bsb Business

...GCSE Business studies Sources of Finance 1) Use the writing frame to summarise the key information on the following internal and external sources of finance. Try to include under “purpose” whether the source will be used for the purchase of fixed assets, purchase of current assets or financing of day to day operations. |Internal sources |Purpose, cost, availability, time-scale | |Name |Brief description and purpose |Advantages |Disadvantages | |Retained profit | | | | | | | | | | | | | | | | | | | | | | | | | | ...

Words: 874 - Pages: 4

Premium Essay

Lit1 Task 1

...business and its owner. This is the most common form of doing business in the United States ( Terence Lau and Lisa Johnson, 2015) | Two Advantages | There are many advantages to this type of business. First it is easy to create a sole proprietorship. The entrepreneur in charge simply starts the business. Another advantage is autonomy. The owner is able to decide what they want to do with the business, concerning hours, rules, and regulations and decide all of the factors needed to run the business. ( Terence Lau and Lisa Johnson, 2015) | Two Disadvantages | There is also some disadvantages to a Sole Proprietorship. Firstly there can only be one owner, so it is not possible to bring other in to the business. If the owner dies, then the business dies as well. Another disadvantage is raising the working capital for the business, especially to start the business. Without the capital it is difficult to expand the business and produce profits (Terence Lau and Lisa Johnson, 2015). | Liability | In a sole proprietorship the liability feature is an unlimited liability. This means that there is no different between the owner and the business, so the owner is liable for all of the debts and obligations of the business. If the owner runs into financial difficulties, he or she is personally liable to pay these finances. All of the personal assets of the owner are reachable by creditors (Terence Lau and Lisa Johnson, 2015). | Income taxes | There is no legal distinction between......

Words: 3296 - Pages: 14

Premium Essay

Accounting Ethics

...any required permits. The license and permit required can affect the type of partnership that is formed (SBA, "Partnership"). The three different types of partnerships include: General Partnership, Limited Partnerships and Joint Ventures. General Partnerships mean that all profits, liabilities, and the duties of management are divided equally between the parties involved. A Limited Partnership is a bit more complex. Limited Partnerships allow each partner to have limited liability as well as limited input with regard to management of the business. Each of these limits is determined by what percentage each partner has. A Joint Venture functions only for a limited period of time (SBA, "Partnership"). Partnerships have advantages and disadvantages. Partnerships tend to...

Words: 2431 - Pages: 10

Premium Essay

Business

...source of finance. Advantages of this are that it doesn’t have to be repaid and no interest is payable. Disadvantages of this is that there is a limit to the amount an owner can invest. • Retained profits this source of finance is only available for a business which has been trading for more than one year. It is when the profits made are ploughed back into the business. This is a medium or long-term source of finance. Advantages of this can range from the fact that it doesn’t have to be repaid and that no interest is payable. Disadvantages of this are that some businesses are unlikely to have surplus assets to sell also there can be a slow method of raising finance. ASDAs retained profit in 2013 was £5.1billion. In 2014 it increased to £5.5billion. • Sale of stock This money comes in from selling off unsold stock. This is what happens in the January sales. It is when the profits made are ploughed back into the business. This is a short-term source of finance. Advantages of this are that it is a quick way of raising finance. Also by selling off stock it reduces the costs associated with holding them. A disadvantage of this is that the business will have to take a reduced price for the stock. ASDAs stock value in 2013 was £1.12billion this decreased to £1.16 billion in 2014 • Sale of fixed assets This money comes in from selling off fixed assets, such as: -a piece of machinery that is no longer needed Businesses do not always have surplus fixed assets which they can......

Words: 430 - Pages: 2

Premium Essay

P1 Unit 1 Business

...size of the industry, the liabilities it has and the advantages and disadvantages of the business ownership. Type of Business Ownership and Business Sector | Snac Attack | Cameron Blake Chartered Accountants | Sole Trader- A sole trader is a business which is owned by one person. The owner can employ others but they are their responsibility.A sole trader operates in the private sector. | Business Purpose and Activity – Snac Attack provides a food and drink service to consumers and customers to people in the local area. This business aims to make a profit. | Business Purpose and ActivityCameron Blake Chartered Accountants provides a service to the North East area. They provide customers with a service which can take care of their Financial Accounts. | | Size and scaleThis business operates on a small scale in the local area, Felling. | Size and ScaleThis business operates on a small regional scale. | | SectorSnac Attack operates in the tertiary sector as they provide a service to the customer. | SectorCameron Blake Chartered Accountants operate in the tertiary sector as they provide a service to customers. | | Liabilities This business has unlimited liability. This means that the owner is liable for all the debts of the business meaning that if the business fails the owner’s personal possessions may be taken. | LiabilitiesCameron Blake Chartered Accountants have unlimited liability. | Advantages | An advantage of being a sole trader is that the owner can make......

Words: 2488 - Pages: 10

Free Essay

Business Structures: Advantages and Disadvantages

...Business Structures: Advantages and Disadvantages FIN/571 09/23/13 Kenneth Baker Introduction Starting a business can be challenging for individuals. That individual will have to decide which business structure will be right for their business and develop a solid business plan from that structure. There are many business structures available to new business owners, there is sole proprietorship, partnership, limited liability company and corporation. This paper will identify each structure and list the advantages and disadvantages of each structure. Sole Proprietorship  Sole proprietorship has no other owners to divide profits with, which allows a sole proprietor to use company funds in any way the individual see fit. Sole proprietorships are easier to set up out of the other structures and is easy to separate. Some advantages are no business registration is not required, there is no requirement to file formation documents like the person would if their business structure were LLC. Sole proprietorship has easier bookkeeping. The owner and business are one and the same so it is like balancing your checkbook. Any profits are taxed at the owners individual federal tax rate so that person does not have to file a separate business tax. The disadvantages would be the lack of liability protection for the business owner. This means the owner would have to take personal responsibility to pay every business debt and obligation and their personal assets are not protected......

Words: 775 - Pages: 4

Premium Essay

Finance Organization and Long Term Planning

...long-term financing if they want to expand their business as Genesis is planning by starting operations in Europe and Asia. Sources of long-term financing include shares that are issued to the public and these holders are considered the owners of the business. There are two types of shares – equity and preference. The advantages of equity capital is no fixed maturity, no obligation to redeem, no compulsion to pay dividends, provides leverage capacity, and dividends tax exempt for investors. The disadvantages of equity capital are dilution of control of existing owners, high cost – rate of return expected by the equity holders higher than debt holders, dividends are not tax deductible, issue cost are higher due to underwriting, brokerage, and other issue expenses, along with higher servicing costs including post annual reports (Fedorov, 2012). Preference capital advantages are no obligation to pay dividend, no bankruptcy or legal action for non payment, financial distress of redemption obligation not very high, part of net worth which hence increases its creditworthiness/leverage capacity, no dilution of control, and no pledging of assets required. The disadvantages are expensive source since dividends are not tax deductible, though no legal consequences the liability to pay dividends stand and can spoils company’s image, can require voting rights if company skips dividends, and have claim prior to equity holders (Fedorov, 2012). Retained earnings are...

Words: 1054 - Pages: 5