- Things like cash, receivables, property, or equipment are all examples of tangible assets.
- Property, plant and equipment can be both current assets and long-term assets.
- A company’s tangible assets can be a good indicator of its financial health.
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Put simply, assets are anything of value that a company, person, or other entity owns that could be exchanged for cash. A company’s wealth is an important consideration when assessing its financial health. They are categorized and accounted for in many different ways, one of the main types being tangible assets.
What are tangible assets?
These types of assets are physical things and have a specific monetary value. Both companies and individuals can own them. For example, jewelry or art collection are both tangible assets that a person might have. However, the term tangible assets appears most frequently in the business context.
Most companies value two specific types of property, plant and equipment: current and non-current. They are also called fixed or fixed assets. The key differentiator between the two is how quickly the asset can be exchanged for cash.
Current assets are tangible assets that can be exchanged for cash in less than a year. Assets of this type include cash, accounts receivable, inventory or stock, accruals and marketable securities.
The most liquid of these assets – typically trade accounts receivable, cash and cash equivalents, and marketable securities – are used to determine a company’s quick ratio, which shows the relationship between its liquid assets and current liabilities.
The total current assets of a company are used to determine the current ratio. These two metrics are important metrics in determining an organization’s solvency, or its ability to repay current and current liabilities.
Long-term assets include things like property, equipment, machinery, and buildings. “These are things that would take longer than a one-year horizon,” says Smith. These assets can be converted to cash, but not as quickly or easily as current assets.
The value of all fixed and long-term assets, with the exception of land, decreases over time. Organizations do this to reconcile the total cost of an asset with the revenue it generates over time. The IRS requires companies to follow specific guidelines in the depreciation of fixed assets.
Why is it important to understand real assets?
A company lists its tangible assets on its balance sheet, which are available to publicly traded companies through 10-Q or 10-K filings. For investors interested in buying or selling a company’s stock, tangible assets can be a good indicator of the company’s financial health, among other metrics.
As previously mentioned, tangible assets form the basis of two important ones
Metrics that indicate an organization’s ability to repay debt. “Liquidity, to some degree, reflects short-term strength, flexibility and maneuverability,” Smith explains. It can also mean that a company can capitalize on short-term market opportunities and absorb short-term adversity.
Seeing that a company owns many tangible assets can also indicate its potential for growth. “Generally, if you own a lot of real estate, land, and equipment, these companies are going to be on the industrial side of things and more defensive,” Saunders says. If you buy stock in a company like this, it might be a steadily growing company, “not a high-flying stock,” he explains. However, seeing that the company owns the equipment could bode well that it can produce and supply the goods it markets.
However, if you examine the financial statements of a company that should own many long-term tangible assets, such as to scale over the long term. The type of organization should help you determine what an organization should or should not own.
Tangible vs. intangible assets
While tangible assets can be important to businesses, many organizations own a mix of tangible and intangible assets. Intangible assets are not physical things. These include goodwill, brand awareness and intellectual property.
Intangible assets are “definitely important to a business, but much more difficult to value,” says Saunders.
In an increasingly digital world, these types of assets become even more important. “Things like brand licenses, maintenance fees, and service models that generate recurring revenue are increasingly becoming a larger part of a given company’s value,” says Smith.
What a company holds more of, whether tangible or intangible, ultimately depends largely on the nature of the business. A developed software is likely to own more intangible assets, while a manufacturing company will usually own more tangible assets.
“There’s nothing wrong with either of them,” says Saunders. “It really depends on the type of business that’s out there.”