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- Things like cash, accounts receivable, property, or equipment are all examples of tangible assets.
- Tangible assets can be both current assets and long-term assets.
- A company’s tangible assets can be a good indicator of its financial health.
- Read more stories from Personal Finance Insider.
Simply put, assets are anything of value that a company, person, or other entity owns that could be exchanged for cash. A company’s assets are a key consideration when assessing its financial health. They are categorized and accounted for in many different ways, with one of the primary types being tangible assets.
What are tangible assets?
“Anything that you can hold or touch could be considered a tangible asset,” says Steven Saunders, a chartered financial analyst at Round Table Wealth Management.
These types of assets are physical things and have a specific monetary value. Both businesses and individuals can own them. For example, a jewelry or art collection are both tangible assets a person might have. However, the concept of tangible assets most frequently appears in a business context.
Most companies evaluate two specific types of tangible assets: current and long-term. They’re also called fixed or capital assets. The key differentiator between the two is how quickly the asset could be exchanged for cash.
Current assets
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, prepaid expenses, and marketable securities.
The most-liquid of these assets — usually accounts receivable, cash and cash equivalents, and marketable securities — are used to determine a company’s quick ratio, which shows the relationship between a its liquid assets and current liabilities.
All of a company’s current assets are used to determine its current ratio. Both of these ratios are important measures to determine an organization’s solvency, or it’s ability to repay current liabilities and short-term obligations.
Long-term assets
Long-term assets include things like property, equipment, machinery, and buildings. “It’s things that would last longer than a one-year horizon,” Smith says. These assets can be converted into cash, but not as quickly or easily as current assets.
The value of all fixed and long-term assets, except for land, depreciates over time. Organizations do this to match the total cost of a fixed asset to the revenue it generates over time. The IRS requires businesses to follow specific guidelines when depreciating long-term assets.
Why is understanding tangible assets important?
A company will list its tangible assets on its balance sheet, which are available for publicly traded companies through 10-Q or 10-K filings. For investors interested in buying or selling stock from a company, tangible assets, in addition to other metrics, can be a good indicator of the organization’s financial health.
As mentioned, tangible assets form the basis of two important liquidity ratios, which point toward an organization’s ability to repay debts. “To some degree, liquidity is a reflection of short-term strength, flexibility, and ability to maneuver,” Smith explains. It may also mean an organization can take advantage of short-term market opportunities and absorb short-term adversities.
Seeing that a company owns many tangible assets can also speak to its growth potential. “If you own a lot of real estate, land, and equipment, those companies are generally going to be on the industrial side of things and be more defensive,” Saunders says. If you buy stock in a company like this, it may be a steady grower, “not a high flying stock,” he explains. However, seeing the company owns the equipment might be a good sign it can produce and deliver on the goods it markets.
That said, if you are examining the financial reports of a company that should own a lot of long-term tangible asset, like a farm, and it doesn’t have those assets, that might be concerning and open up questions about the organization’s ability to scale long-term. The nature of the organization should help you determine what an organization should or shouldn’t own.
Tangible vs. intangible assets
While tangible assets can be important to businesses, many organizations own a mix of tangible assets as well as intangible assets. Intangible assets are not physical things. These include goodwill, brand recognition, and intellectual property.
Intangible assets are “definitely important for a company, but a lot harder to value” Saunders says.
In an increasingly digital world, these types of assets are becoming even more important. “Things like brand licenses, servicing fees, and recurring-revenue-generating service models are increasingly becoming a larger part of the value of a given company,” Smith says.
Ultimately, what a company holds more of, whether tangible or intangible assets, will largely depend on the nature of the business. A software developed will likely own more intangible assets, while a manufacturing business will usually own more tangible assets.
“There’s nothing wrong with either of them,” Saunders says. “It really depends on the type of business that’s out there.”
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