What Is a Tangible Asset?
Let me explain what a tangible asset is. It's an asset with a finite monetary value and usually a physical form that you can touch. You can typically transact these assets for some monetary value, though liquidity varies across markets. They're the opposite of intangible assets, which have a theorized value rather than a direct transactional one.
Understanding Tangible Assets
A business's net worth and core operations depend heavily on its assets, and managing them is why companies keep a balance sheet. Assets must balance in the equation: assets minus liabilities equals shareholders' equity. Companies have two types: tangible and intangible. Tangible assets have a finite value and physical form—these are items you can touch and use in operations.
Most tangible assets share common traits. They have a physical form you can touch, alter, or see. They're used to drive future economic benefits. They may depreciate as their form deteriorates. You can often use them as collateral for loans. And they might hold residual value after their useful life ends.
Types of Tangible Assets
Tangible assets fall into current or long-term categories. Current assets may or may not be physically present but have a finite transaction value. Long-term assets, or fixed assets, are less liquid and more capital-intensive, usually larger tangible items.
You record them on the balance sheet at acquisition cost. Long-term ones depreciate over time—a noncash notation reducing value by a scheduled amount. Current assets convert to cash within a year, so no depreciation; think inventory sold quickly.
Take inventory: if you can touch a product, it's tangible. This covers raw materials, goods in process, and finished products not yet sold. For equipment and machinery, it's all the heavy pieces in manufacturing that physically interact with production. Furnishings and fixtures include everything in an office you can see and touch, like desks and computers. Land is tangible no matter the use—physical plots, not digital ones. Buildings are obvious tangible assets, from offices to warehouses, including improvements.
How to Value Tangible Assets
There are three main ways to value tangible assets, depending on uniqueness, location, and condition. For precision, hire an independent appraiser who's an expert in the field. They'll evaluate condition and external factors, issuing a report on aspects like modernization and market conditions.
You could use liquidation price—what it fetches in the open market right now. This might be lower due to costs and illiquidity, forcing discounts. Replacement cost is what insurers use, basing policies on rebuilding or replacing the asset, not its full value.
Advantages and Disadvantages of Tangible Assets
Tangible assets hold real value—you can occupy buildings, utilize land, or operate machinery. They have purposes beyond investment, like farmland that's always needed for food, making them stable in uncertain times with low correlation to stocks. They offer dual benefits: appreciation and cash flow, such as rent from a commercial building.
But they're not perfect. Risks include physical damage from weather or humans, obsolescence like empty offices post-COVID, and easier theft since possession often equals ownership. They require extra expenses for storage, management, and protection.
Tangible vs. Intangible Assets
Both tangible and intangible assets make up a firm's total assets, recorded on the balance sheet for performance analysis. Intangible ones are non-physical with theoretical value, like copyrights or patents. Their value often comes from the firm itself, and they can be acquired in deals.
Tangible assets can be touched and have real-world use, but they're harder to store and insure. Intangibles can't be touched, lack physical utility, but are easier to manage and transfer, with potentially less stable value.
The Bottom Line
Companies own various assets, including tangible ones that you can touch and that provide future economic benefits. They offer real-world use but need extra care for safeguarding and preservation.
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