Property, plant and equipment are physical or tangible assets that are long-lived assets that generally have a lifespan of more than one year. The following are examples of tangible capital assets (fixed assets):
- Vehicles like trucks
- Office furniture
- Machinery
- Buildings
- Undeveloped land
Fixed assets are also known as fixed assets, which are long-lived physical assets. Industries considered capital-intensive have a significant amount of fixed assets, such as oil companies, automobile manufacturers, and steel mills.
Key points to remember
- Property, plant and equipment (PPE) are the long-lived physical or tangible assets of a business that typically have a lifespan of more than one year.
- Examples of tangible capital assets include buildings, machinery, land, office equipment, furniture, and vehicles.
- Businesses record their net tangible capital assets in their financial statements.
- Potential investors and analysts examine a company’s fixed assets to determine the types of capital expenditures it makes and how it raises funds for its projects.
Characteristics of fixed assets (fixed assets)
Fixed assets have a useful life assigned to them, which means they have a set number of years of economic value to the business. Fixed assets also have a salvage value, which is the remaining value at the end of the life of the asset. Salvage value is also called scrap value.
During this time, fixed assets undergo depreciation, which divides the cost of the fixed assets, expensing them over their useful life. Depreciation allows a business to avoid a large outlay of cash in the year the asset is purchased.
Property, plant and equipment are depreciated for accounting purposes while intangible assets are depreciated.
Depreciation also allows the cost of the asset to be spread over several years, which allows the company to derive income from the asset.
How to calculate fixed assets (fixed assets)
It is important for a business to accurately record its tangible assets on its balance sheet. Analysts and potential investors will frequently look at a company’s fixed assets to see where and how the company is spending its capital money in ways that will help it increase its profitability.
It is also important for companies to keep track of their fixed assets in case they need to sell assets to raise cash. While most fixed assets depreciate over time and are not easily converted into cash, some assets such as real estate can appreciate in value over time, providing a business with a possible option to raise cash.
Companies use the following formula to calculate property, plant and equipment:
Net PPE = Gross PPE + Capital expenditure – Accumulated depreciation
To determine net tangible capital assets, add gross tangible capital assets to capital expenditures. From this amount, subtract the accumulated depreciation.
Impact of Fixed Assets (PP&E) on Investors
Expanding businesses may decide to purchase capital assets to invest in the long-term future of the business. These purchases are called capital expenditures and have a significant impact on a company’s financial condition. Whether some of the available cash is used or the asset is financed with debt or equity, how the asset is financed has an impact on the financial viability of the business.
It is important to know where a company allocates its capital, whether the company is making capital expenditures, and how the company plans to raise capital for its projects.
If new shares are issued, the share price may decline due to stock dilution. If the money is used, the company may be unable to pay dividends in future quarters. If the business obtains financing from a bank or private equity firm, the business will have debt service charges associated with the additional long-term debt.
The essential
Property, plant and equipment (PP&E) are the long-lived tangible assets that a business owns. These are most often fixed assets. Fixed assets, which include trucks, machinery, plants, and land, enable a business to conduct and grow its business.
Fixed assets are depreciated over time and can be sold for their salvage value. When a business buys fixed assets, it is called a capital expenditure. Proper management of capital expenditures is crucial to a company’s growth and profitability, so much so that investors analyze how a company manages its fixed assets to determine whether its capital expenditures will contribute to its success or to a drain on its funds.