How does a company build value? What goes in must come out!

When starting out to analyze companies it might be hard to understand what all these balance sheets and income statements are all about. There can be a lot of pitfalls and creative accounting but in essence it is about putting something into a company and then either keeping it there or taking it out.

A company can receive assets (often cash) by selling its products and/or services.

A company can also accept investments and gain assets by that activity. Assets leave the company either as costs when it buys things to be able to conduct business or when it issues dividends to investors.

The company can accumulate assets within its own umbrella and that should mean that the value of the company goes up. This is because the company now has more assets than before. If dividends are paid out the value of the company should go down with the same amount because it now has less assets.

The ability of a company to generate new assets by itself obviously goes into the valuation but that is something that concerns the future valuation of a business.

So, if a company continues to pile up cash from income and does not distribute any to investors through dividends, it should be possible to see this on the balance sheet, and the value of the company increases if all other variables are equal.

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