It is naturally the case, isn’t it? Your body, your belongings are your physical assets. Your reputation is your intangibles. Your borrowings (credit card, loans, mortgages, excessive level of cholesterol/body fat/blood sugar) are the liabilities. Your wages/incomes are the revenue you earn, the food you eat, the utility bills you pay are the operating expenses. If (knock on wood), there is a illness, then you need to put lot of money to repair your body (that’s certain Repair and Maintenance item in P&L statement).
So, some people spend their spare time reading great books, practicing and acquiring skills, working out to improve their strength and endurance, adding efficiency tools to their life so they can cut expenses (both on money and on time). Some people would just be sitting on couch binge-watching some TV dramas or binge-playing some video games day in and day out, slowly depreciating the physical assets they own (body) and not adding any to the intangibles (most of time, to reputation and other personal recognition, except the professional video game players).
Always ask yourself this question: as a company, am I growing my book value over time consistently or I have peaked? Lots of people’s productivity (or earning ability) declined after peaking at their 40s. They blame the society or other unfortunate events for their own failure. But what I observed in the past was that many of them became comfortable in their position and achievements, so they stopped reinvest in themselves. They stopped acquiring new skills, they stopped working out to make their physical form better, they stopped training their brain to make the minds sharper. Slowly, their intrinsic value declined, their “book value” stopped growing, their “depreciation” is faster than their net earnings or net value created, they became “unprofitable” from a personal perspective. In the end, the job that used to pay them certain wage in exchanging their earning ability became inadequate and these people get demoted or become unemployed.
So I would encourage everyone reading my blog to do an objective assessment on yourself as a company (and these are the questions I ask myself often to remind myself):
- Balance Sheet:
- How would you define your current balance sheet? Is it highly leveraged – lots of credit card debt, loans and mortgages or it is healthy?
- Do you have a growing book value over time?
- Do you have comfortable cash or cash equivalents?
- Do you have a growing set of intangible assets (good reputation) or do you need to impair your reputation due to some actions you made?
- Do you carry too much inventories? (if so, remember they will incur greater depreciations over time)
- Income Statement
- Did you achieve a consistent earnings growth in the past many years?
- Did you grow your operating expenses even faster than your revenue?
- What’s the quality of your earnings? are they contract based or they are highly fluctuating?
- Are your earnings mostly in wages or your earnings are mostly in investment income?
- Did you apply reasonable depreciations to your assets? (your body, your possessions, your clothing, your home, your cars etc.)
- Are there a lot of unrealized paper gain due to some appreciation you marked from your investments? – which are not stable operating income and highly volatile
- Cash Flow Statement
- Are you generating free cash flow? (Cash from Operations – Capex)
- Are you allocating enough cash flow (or something equivalent) into your assets (body, home, equipment, tools) to make sure your earning power is holding up and gain over time? Note it includes time spent to acquire skills, which can be quantified by hours x hourly income. If you are in an industry that is highly subject to technology disruption, did you invest heavily enough to make sure you can still maintain earning power in future?
- Did you always pull cash from financing activities (thus add leverage to your balance sheet) to support cash flow deficit? Or are your paying off some high interest loans to de-leverage yourself?
- How well are your free cash flow covering your fixed charges (rents, taxes, interest expenses etc.)
Philosophically, all these are linked and connected. If you are evaluating companies for potential investment, you want to assess yourself from time to time to see if you are building yourself into a great enterprise