My advice for those who are crazy about asset growth, pay attention to your net worth

Hello Steemians.....
I want to write boring topics again. Especially if it's not the financial world. Boring but really important. So ok just write it. This time about the difference between Asset and Net worth. Often we hear the expression, the greatness of its assets doubled, etc. This has long tickled me. Why are assets of concern? Not net-worth?

Or you might have heard the term "high net-worth individuals"? abbreviated as HNWI. If you often interact with people in the world of financial services, you must have heard it. Yes, these HNWI people are people who are usually hunted by providers of investment banking services, private banking, priority banking, and other forms of investment such as deposits, mutual funds, forex or stocks. Why are they? Yes, because they have net-worth in relatively high amounts compared to members of society in general.

If you are observant enough, you might wonder why the criteria are "net-worth", not "asset". Isn't asset an asset. Is not what is included in the "Asset" group are cash, investments in the form of time deposits, etc. as well as investments in fixed assets such as land and buildings. So, it should be if you want to find people with large amounts of wealth, just look at the assets. Of course this is not just a matter of terms, but there are indeed significant differences between individuals with lots of assets and individuals with lots of net-worth.

Likewise when the banker analyzes a company, they will not be too fascinated by the expression of the debtor "our assets increase by a percentage", etc. Because the increase in assets does not necessarily have a positive understanding.

Asset Source

Let's talk a little about accounting principles. In the balance sheet, all wealth is recorded in the asset group that is on the left, and the obligations and capital are recorded on the right. As the name implies, "balance sheet" or balance sheet. Accountancy adheres to the recording of two sides, so we also have to record the opponent or the source of the addition and subtraction of the wealth. For more details, use the example:

For example, if you set up a business unit with a capital of Rp. 100,000, then your "cash", which belongs to the asset group, will increase by Rp. 100,000. And, you also have to record the opponent who is the source of the cash in this case "capital deposited" as much as Rp. 100,000. So the asset group that is to the left of the balance sheet will balance with the group of liabilities that are on the right of the balance sheet.

Then it turns out to increase working capital, you borrow Rp. 500 thousand from your uncle, then now your "cash" increases to 500 to Rp. 600 thousand. And don't forget, note that the opponent who is the source of the cash is "debt" in the liabilities group, amounting to Rp. 500 thousand. So now your total assets to the left of the balance sheet are Rp. 600 thousand in cash, and your total liabilities on the right are Rp. 600, which is Rp. 500 from debt + Rp. 100,000 from paid up capital.

So, there are two sources of assets in this case, from capital, or from debt. If you want to know the amount of net worth (net-worth), just subtract the value of assets with the amount of debt. That's where the true value of wealth is. If you want to know the value of a company's stock, you can also use the same method. Net-worth is divided by the number of shares. This is what is called the stock book value.

How come in the business the higher the asset, the better? Not necessarily. See where the assets are. If from debt, then you must first analyze the type of debt. If all consists of liquid debt that must be paid in less than one year. While increased assets are fixed assets that are not liquid, the conditions are actually alarming. Besides that, asset quality must also be considered. Assets that are illiquid and not marketable are certainly other assets that are liquid and easily traded. Especially if the assets are not productive. It should be written-off instead.

Net-worth Resources

Well, to better understand, we also have to analyze where the net-worth comes from? Earlier we knew that the source was paid up capital. But don't stop there. As long as the business goes, you should make a profit. In accounting, this profit is not recorded on the balance sheet but in the Profit and Loss statement. The recording is from the sale, minus the cost of goods sold, eits, for a moment, there are readers who may be laymen, what is this HPP? In short, this is the cost you incur to procure the items you sell. No more available items are sold less inventory, that's your HPP.

Now the sale of this reduced HPP is your gross profit. In reducing operational costs it will find net income before interest and tax (earnings before interest and tax). Reduce the tax and interest expense again, find net profit. Well, where are you going to profit, for example, you have nothing to do with your profits and will be used for business again, then he becomes a profit in retained earnings. Well, this retained earnings is the only one that can be recorded on the balance sheet side, adding to the capital position. The opponent on the asset side is the addition of Cash. In other words, profits hold have a positive contribution to increasing Net-Worth.

So What's the Meaning?

We can see business growth from asset growth. However, it must be considered the source of asset growth. If the source is debt, then we must pay attention to the ratio of the ratio between debt and capital. Excessive debt to equity ratio has a greater risk, because debt results in cash-outflows in the future, both in the form of principal installments and interest. Interest expense, is a component that will reduce net profit, which in turn decreases the value of "net-worth". Without being followed by revenue growth from business operations, it can be expected that businesses that experience "asset growth" will face problems immediately.

So, my advice for those who are crazy about asset growth, pay attention to your net worth. Hopefully, you will quickly enter the High Net Worth Individuals group. Or have you?