Asset base

From CEOpedia | Management online

Asset base is a value of assets that gives value to a company or investment. The asset base is variable in time. The company therefore can sell an buy assets and change its asset base. Substantial change in asset base is an important signal for investors. It can be an effect of problems or to the contrary, opportunities.

In case of loans, asset base is taken by lenders as a guarantee that the company is able to pay the loan at least to the value of asset base. Thus asset base backs loan in case it couldn't be repaid.

"The asset base of a firm is the total value of tangible and intangible assets or benefits in the books of or owned by a bank which are used in the ordinary activities of the bank in generating income, determined by their book value, market value or residual value, including cash, machinery, inventory, land, building, enforceable claims, intellectual property rights, and goodwill" (D.W. Dagogo, P.I. Okorie 2014, p.283). According to Accounting Principles asset is the one side of balance sheet the other contains liabilities and owners equity. Thus long term liability and owners equity must be the same as net assets. It means that funds from owners equity and funds which were borrowed are intended to buy assets and then these assets are used in firm's common business.

The regulatory asset base(RAB)

The purpose of creation The Regulatory Asset Base(RAB) model was to valuate the assets in the field of the privatization process in The Great Britain due to providing privatized network tools specifying the rules for calculating price limits. The regulatory asset base model in which private sector is inserted into financing, operation of infrastructure and delivery. "In the RAB model, private(or corporatised state-owned) companies act as the infrastructure manager: they own, invest in and operate infrastructure assets." (D.Makovšek, D.Veryard 2016, pp. 6-7,12). In order to get back investment costs and finance its business this infrastructure manager gets charges revenue from customers. The most important advantage of RAB is that it is characterized by the undermost financing costs just slightly above the level of government bonds.

The Evolution and Development of RAB

"The key concept behind the RAB is FCM (financial capital maintenance)." (J.Stern 2013, pp.4-5). In general RAB and FCM concern the matter of maintaining the financial capacity of the company. In the 80s of the 20th century RAB has been applied as a control method for nationalized UK industries.

Examples of Asset base

  • Cash: Cash is the most liquid asset base for any company. Cash is used to purchase goods and services, pay bills and dividends.
  • Bonds: Bonds are a form of debt that companies use to raise money. They are generally issued with an interest rate and a maturity date.
  • Stocks: Stocks are shares of a company that investors can purchase. They can be traded on the stock exchange, and their value is based on supply and demand.
  • Property: Property is a physical asset, such as land, buildings, and equipment. Companies can use this to generate income or as collateral for a loan.
  • Intellectual Property: Intellectual property is intangible assets that are protected by law. This includes trademarks, patents, copyrights, and trade secrets.
  • Goodwill: Goodwill is an intangible asset that reflects the value of a company's reputation. It can be used to attract customers and increase sales.

Advantages of Asset base

An asset base is an important component of a company or investment's value and can provide a number of advantages. These include:

  • Increased liquidity: Assets can be sold quickly to generate cash, helping the company or investment stay afloat in case of a financial emergency.
  • Lower debt levels: By having a large asset base, the company or investment can take out less debt and thereby reduce their risk of default.
  • Increased credibility: Having a large and varied asset base can give investors more confidence in the company or investment, making it easier to attract new investors and partners.
  • Potential for higher returns: Having a large asset base gives the company or investment more options to invest in and therefore increase their returns.
  • Potential for diversification: Having a large asset base can allow the company or investment to diversify their investments and reduce their risk.

Limitations of Asset base

  • An asset base can be limited by the amount of capital a company has. If a company does not have enough capital to purchase necessary assets, then its asset base will be limited.
  • An asset base can be limited by the availability of assets in the marketplace. If certain assets are not available, then a company's asset base will be limited by what is available.
  • An asset base can be limited by the risk tolerance of the investors. If investors are not comfortable with the risk associated with certain assets, then the company may not be able to acquire those assets.
  • An asset base can be limited by the company's ability to manage those assets. If a company does not have the expertise or resources to manage certain assets, then its asset base will be limited.
  • An asset base can be limited by the laws and regulations of the jurisdiction in which the company operates. If certain assets are not allowed in a certain jurisdiction, then the company may not be able to acquire those assets.

Other approaches related to Asset base

  • Asset Mix: Refers to the changing ratio of different asset types, such as stocks and bonds, cash and derivatives, or equity and debt.
  • Risk Management: Risk management is the process of analyzing and managing the risk that a company's asset base can encounter, such as currency, interest rate, credit and market risks.
  • Investment Strategies: Investment strategies refer to the use of different approaches and techniques to create a portfolio that meets specific return and risk objectives.
  • Financial Planning: Financial planning is the process of analyzing, coordinating and managing investments, taxes, retirement and other financial goals.

In conclusion, asset base is a key factor in determining the value of a company or investment. Other approaches related to asset base include asset mix, risk management, investment strategies, and financial planning. Each of these approaches can help to create a portfolio that meets specific return and risk objectives.


Asset base — recommended articles
Capital Base — Trading capital — External sources of finance — Assets funding strategy — Borrowing capacity — Classification of financial markets — Funding Operations — Borrowing Base — Debenture Redemption Reserve

References

Author: Karolina Korbut

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