What is an asset? Today’s article will help investors understand a section of an important financial statement: the balance sheet. As individuals, we own many assets. However, this article won’t focus on that $1,000 baseball card you own. Instead, we’ll look at various types of assets companies own and how they can affect their market valuations.
How do we define an asset? It’s a resource with an economic value that will bring future benefits.
They can be cash-generating, expense-reducing, or general improvements. They’ll increase the value of a firm and increase its future returns. They can be physical or intangible.
Assets are useful for measuring the financial state of a company. When they outweigh liabilities, the company is deemed solvent.
This formula may sound familiar to anyone who took a basic accounting class. Assets = Liabilities + Equity.
Some gain and lose value over time. This is called appreciation and depreciation. This changes the company’s worth. It also gives a timeline of the remaining life of the asset. Assets must satisfy the three following properties.
Companies must own their assets. They can’t be leased or borrowed. Nobody else can have control of it. An important note is that the labor workforce isn’t considered an asset. They are part of the capital of a firm. The company doesn’t own the employees.
In most cases, they can pack their bags and leave anytime. We often hear the term ‘’our employees are our greatest assets”. They may be an integral part of the business but aren’t assets.
Finally, assets have to be resources. This means they must produce future economic growth and cash inflows for the business.
In the following section, we will look deeper into different types of assets and their characteristics.
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Current assets are usually very liquid. This means they can be sold and converted into cash quickly.
Successful companies don’t want to accumulate unpaid accounts receivable. Some companies have gone bankrupt before because they weren’t getting paid.
This is usually within a year. The value of these assets doesn’t fluctuate much over time. They include the following items.
- Financial Assets (stocks, funds, bonds, and other liquid securities)
- Accounts Receivables (amounts owed to the company)
- Inventory (what remains to be sold by the company)
Too much inventory is also a risk if it can’t be sold on time. Today’s most valuable companies hold a lot of cash and equivalents.
This prevents them from raising capital and being able to finance their projects, such as research and development, mergers and acquisitions, etc. This is especially important for tech, healthcare, mining, and early-stage firms.
Fixed assets are long-term resources. They’re usually more difficult to convert into cash.
Often, it takes more than one year.
Many fixed assets depreciate over time. There are various ways to measure that, but we won’t get into the math here.
What can be considered a fixed asset?
- Real Estate (buildings and land owned by the company to conduct business)
- Machinery and equipment (used to make the products and services)
- Vehicles (used to transport goods and services)
They’re often the foundation of an organization. Nobody wants to invest in a company working out of their parent’s basement. Employees who are happy in their work environment will be more productive.
Furthermore, when companies have enough money to invest in state-of-the-art equipment, their operations are much more successful. What would you think of a transportation company with equipment dating back to the 1990s?
The assets above are considered tangible. They’re real. They can be touched and manipulated.
Intangible assets are the opposite of tangible, meaning they can’t be touched or manipulated.
However, they can be an essential part of many businesses. They can be sold or leased to other companies.
Intangible assets can appreciate or depreciate over time. They can be valid for a certain lifespan or indefinitely.
Below are examples of intangible assets.
- Permits (to drill a certain area for resources)
- Patents (on the manufacturing and design of certain products)
- Trademarks and Copyrights (for protection against imitators)
- Research & Development (activities conducted to innovate and develop new technology and services)
- Brand name (Tesla, Apple, or Nike are good examples, as some will pay more if the brand logo is on the desired article)
They’re important for a company’s competitive advantage and brand. If anyone could access Instagram’s code and features or Nike’s logo and designs, there wouldn’t be anything to distinguish us.
We love to differentiate ourselves by what we wear and use as a society. Brands know this and fully take advantage of it. However, showing off that new iPhone 12 or 13Pro/Max/ProMax is also important. This gives us recognition in today’s society.
Sometimes, it can be hard to associate a dollar value with an intangible asset. How much is a trademark or a patent worth? What about a brand? Is there such a big difference between a Google Pixel, an iPhone, and a Samsung to justify the price difference? The name on the phone adds extra value to it.
Operating vs Non-Operating Assets
What is the difference between both categories? Operating assets are essential in the company’s day-to-day business operations. Most intangible assets, such as land, equipment, and inventory, constitute this class. Without them, the business wouldn’t be what it is.
On the other hand, non-operating assets aren’t essential to the company’s daily activities. They can include financial assets and outdated equipment.
Final Thoughts: What Is an Asset?
To conclude, the difference between two companies that are alike is often found in their assets. Their current output and strategy may be the same, but one may be investing in the future. Building proprietary assets or services and investing in new technologies is a must.
When employees and investors see innovative leaders, they often want to be part of the success. Furthermore, the brand name can also play an important role in a company’s growth. Today’s top stocks in each industry have the best human capital and the best available assets on the planet. Don’t settle for the second-best.
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