Following the success of Bitcoin Treasuries, other Digital Asset Treasuries have begun to gain traction in the financial markets, among which Ethereum, Solana, SUI, and a few others have risen to prominence. As investors flock to invest in these treasuries, they often find it challenging to value them due to their non-traditional balance sheets.
In this article, we will understand what differs in DATs as compared to traditional companies, why their balance sheets do not follow traditional valuation techniques, and how an investor can value DATs, especially those that run on the debt model.
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What is a Balance Sheet? Why is it Critical for Investment Valuation?
A Balance Sheet is a universally utilized way of representing a company’s assets and liabilities. The creation of a balance sheet follows the principle that the assets of a company must be equal to its liabilities. When there is a skew in this balance (i.e., liabilities exceed monetizable assets), the company is said to be distressed, hence, deemed a bad investment.
Below is a sample balance sheet of Apple Inc., courtesy of Investopedia. You can read in greater detail about balance sheets on Investopedia.
#NOTE: A company could have a lot of assets in its balance sheet. However, only those are considered valuable that can generate cash.
Balance sheets are considered critical documents and form part of annual compliance for each company worldwide. They have a detailed representation of all the assets (land, property, capital goods, cash, and receivables) and all the liabilities (i.e., debt and payables) that a company has.
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What Makes Balance Sheets of Digital Asset Treasuries (DATs) Different?
Opposite to traditional companies, where operating activities generate the most returns, in DATs, most of the wealth comes from the price appreciation of assets such as Bitcoin and Ethereum.
MSTR Balance Sheet For 2023-24
We at DroomDroom have a detailed history of each crypto treasury balance sheet. Strategy (formerly MicroStrategy) is illustrated below as an example.
Therefore, these balance sheets differ significantly from those of traditional companies or even traditional funds.
No Operating Activity
In traditional companies, operating activities generate the majority of the income, while a small portion of the income is generated by investments.
In the case of DATs, there is no income. All the focus is kept on acquiring assets that are expected to appreciate in price over the long term.
Therefore, only the assets and liabilities of these companies will have significant value, and the rest of the balance sheet fields, such as income and expenditure, will have little to no significance.
However, in the case of traditional companies creating their DATs, such as GameStop, the balance sheet will contain all the relevant fields, including income from operations (sales) and income from investments (Bitcoin Treasury). In such cases, it becomes difficult to analyze the treasury separately.
https://twitter.com/APompliano/status/1904934696858820811
Large Liabilities
Digital Asset Treasuries have high debt because they utilize it to finance their crypto purchases. Hence, their balance sheet contains a substantial amount of debt, which further impacts valuation metrics, such as a high debt-to-equity ratio.
If it were not for other balance sheets, such high debt would seem unsustainable. However, in the case of DATs, these high debts are sustainable as long as the treasury is solvent, i.e, the total value of assets exceeds the total value of liabilities.
For example, in the summary below, the total debt on treasuries
Almost Zero Taxes
DATs hold crypto in the long term, and therefore, they do not make any sales. As a result, their net tax liabilities are zero in the short term. Hence, when reading the balance sheet of a crypto treasury, an investor will find almost negligible amounts of taxes.
However, there have been proposals in the EU and in the USA to tax companies based on their current holdings, even if they have unrealized gains.
How to Assess a Digital Asset Treasury (DAT)?
Digital Asset Treasuries can be assessed in their best way through their balance sheet. The balance sheet can be easily obtained from the websites of these treasuries. They are typically placed under sections named investor relations.
Balance sheets can easily give you details about the total assets, liabilities, and other data about DATs.
We have taken the above balance sheet of Strategy to explain our analytical process below.
Match Assets and Liabilities
Assets and liabilities always match in a balance sheet, even for highly profitable and distressed companies. It is always essential to make sure what assets actually can be monetized and what liabilities actually need repayment.
For example, short-term liabilities need repayment within the year, while long-term liabilities need repayment on maturity. Cash assets can be quickly monetized, while pledged Bitcoins in a treasury cannot.
Check Net Payables and Receivables
Net Payables are liabilities with the most urgency. A company or a treasury must pay them at the earliest. A higher amount of net receivables means the treasury is unable to repay even the most critical payments and might fail to honor redemptions.
Similarly, Net Receivables are payments that the treasury expects to get in a short time, say a week or a month. A high amount of net receivables is rare to see, but when it is present in a balance sheet, the treasury could make a decent gain, increasing its share value.
Receivables and Payables are mostly in one of the following forms.
- Taxes payable to the Government
- Interest on short-term and long-term borrowings
- Cash Receivables and Payables, from customer investments and redemptions
Beware of Deferred Items
Deferred items in a balance sheet show that the treasury might be unable to pay something that was a short-term liability, and its payment has been deferred. The treasury might need to repay this item along with some interest (if it is debt) or with a penalty (if tax).
The presence of deferred items might not necessarily constitute a bad health of treasury, but the amount deferred tells much more. A higher amount of deferred items shows an inability to make necessary payments, while shorter amounts show technical adjustments.
Understand Stockholders’ Equity
Stockholders’ equity is the amount of total investment in the treasury that stockholders have made.
Typically, treasuries raise money either by debt or via equity (issuing stocks).
The total amount of assets in a treasury should always be greater than the total of liabilities plus stockholder equity. Otherwise, the treasury might not be able to honour redemptions.
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