What Is a Hard Asset?
Let me explain what a hard asset is: it's a tangible asset or resource that holds fundamental value. You can think of examples like a fleet of trucks for delivering consumer goods, land, real estate, and commodities. As a business owner or investor, you might purchase these hard assets to improve production, increase revenues, and protect against losses from soft assets. That said, sometimes the value of hard assets drops right along with soft assets.
Key Takeaways
A hard asset is simply a tangible or physical item or resource that you or your company owns. Often, the value of these hard assets moves in the opposite direction from soft assets, which creates a buffer against potential losses. Remember, hard assets can be long-term, like machinery, or short-term, such as raw materials or inventory.
Understanding Hard Assets
Hard assets are usually fixed assets, which means they're long-term assets that help in producing your company's goods and services. These fixed assets last more than one year. On a company's balance sheet, you'll typically see hard assets classified under property, plant, and equipment.
Some examples of hard assets include buildings, vehicles like trucks or cars, machinery and equipment, office furniture, and more machinery. However, hard assets aren't always long-term; they can also be short-term assets, known as current assets, which get used up within a year. For instance, inventory could be a hard asset for your company. If you're manufacturing machinery, the raw materials or inventory, such as machine parts, count as hard assets.
Paying for Hard Assets
When it comes to hard assets that are fixed, they usually require capital investment decisions from your company's executive management team. These assets demand a large outlay of cash or capital, so they're treated as long-term funding decisions. You can fund big-ticket hard assets through banks, venture capital firms, issuing corporate bonds or debt, or even issuing new shares of stock. Investing in something like a new manufacturing plant means your company plans to use it for many years to generate revenue.
The Value of Hard Assets
Hard assets hold particular value because you can use them to produce or purchase other goods or services. In tough times, you can sell them to generate cash if your company faces financial difficulties. When analysts calculate a company's intrinsic value, part of that comes from the value of its hard assets.
Intrinsic value is a calculation of your company's worth using models that analyze cash flow, assets, future revenue streams, and cost structure. Hard assets factor in because you can sell them for cash to pay off debts, bondholders, and shareholders during financial distress or liquidation.
Hard Assets vs. Intangible Assets
Hard assets are the opposite of intangible assets, which are non-physical and used over the long term. Examples of intangible assets include a company's brand, investments in securities, trademarks, patents, copyrights, and franchises.
Technology companies often have many intangible assets, given their patents and significant capital in research and development. In contrast, oil-producing companies rely on hard assets like oil rigs and drilling machinery.
Example of Hard Assets
Take Ford Motor Company (NYSE: F), a US automotive company that produces cars and trucks. If the executive team is looking to buy new machinery for their assembly line, and they also purchase steel and aluminum for rivets, all of those—the machinery, steel, and aluminum—are hard assets.
The assembly machinery is a long-term hard asset, while the steel and aluminum raw materials are current assets since their inventory will likely be used up within a year. Any patents on the equipment, however, would be intangible assets.
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