What Are Long-Term Assets?

What Are Long-Term Assets?

Let me explain long-term assets directly: these are assets, tangible or intangible, that will benefit your company for more than one year. You might hear them called non-current assets, and they include fixed assets like property, plant, and equipment, but also things like long-term investments, patents, copyrights, franchises, goodwill, trademarks, trade names, and even software.

On the balance sheet, you'll see long-term assets reported at the price they were bought for, which means they don't always show the current value. Contrast this with current assets, which you can sell, consume, use, or exhaust in standard operations within one year.

Key Takeaways

Here's what you need to know: long-term assets are investments that benefit the company for many years. They can be fixed assets like property, plant, and equipment, or intangible assets you can't touch, such as long-term investments or trademarks. Keep an eye on changes in these assets, as they might indicate capital investment or liquidation.

Understanding Long-Term Assets

As I see it, long-term assets are those you hold on your balance sheet for many years. They include tangible physical assets and intangible ones like trademarks or patents. There's no strict accounting formula to label an asset as long-term, but it's generally one with a useful life over a year.

Changes in long-term assets on the balance sheet can signal capital investment or liquidation. If a company is investing in growth, it uses revenues for more asset purchases to boost long-run earnings. But watch out: some companies sell these assets to raise cash for short-term costs or debt, which could mean financial trouble.

Current vs. Long-Term Assets

You have two main asset types on the balance sheet: current and non-current. Current assets are those likely to turn into cash within a year, funding operations and paying expenses like accounts payable. Think cash, inventories, and accounts receivable.

Non-current assets, or long-term ones, last more than a year and often several years. They're less liquid, meaning you can't easily turn them into cash.

Depreciation of Long-Term Assets

Depreciation is an accounting method that lets you expense part of long-term operating assets in the current year. It's a non-cash expense that boosts net income and matches revenues with expenses in the right period.

Capital assets like plant and equipment are long-term, except the part depreciated this year. You can depreciate them linearly or accelerated, and it gives a tax deduction. Analysts often look at earnings before depreciation, like EBITDA, to understand the financial picture, since depreciation can hide the real impact of long-term assets on profitability.

Limitations of Long-Term Assets

Long-term assets can be costly, requiring big capital that drains cash or increases debt. A key limitation is that you won't see their benefits for a long time, maybe years, so you have to trust management's planning and capital allocation.

Not all long-term assets generate earnings; for example, drug companies pour billions into R&D, but only a few drugs succeed and profit. When analyzing, take a holistic view using multiple ratios and metrics, not just long-term assets.

Real World Example

Take Exxon Mobil Corporation's balance sheet from September 30, 2018. Their long-term assets include investments and long-term receivables at $40.427 billion, property, plant, and equipment at $249.153 billion (like oil rigs and machinery), and other assets including intangibles at $11.073 billion. Total long-term assets come to $300.653 billion. These appear below current assets on the sheet.