What Are Long-Term Assets?
Long-term assets areassets, whether tangible or non-tangible, that will benefit the company for more that one year. Also known asnon-current assets, long-term assets can includefixed assetssuch as a company's property, plant, and equipment, but can also include other assets such as long term investments,patents, copyright, franchises, goodwill, trademarks, and trade names, as well as software.
Long-term assets are reported on the balance sheet and are usually recorded at the price at which they were purchased, and so do not always reflect the current value of the asset. Long-term assets can be contrasted with current assets, which can be conveniently sold, consumed, used, or exhausted through standard business operations with one year.
Key Takeaways
- Long-term assets are investments in a company that will benefit the company for many years.
- Long-term assets can include fixed assets such as a company's property, plant, and equipment, but can also include intangible assets, which can't be physically touched such as long-term investments or a company's trademark.
- Changes in long-term assets can be a sign of capital investment or liquidation.
Understanding Long-Term assets
Long-term assets are those held on a company's balance sheet for many years. Long-term assets can include tangible assets, which are physical and also intangible assets that cannot be touched such as a company's trademark or patent.
There is no standardized accounting formula that identifies an asset as being a long-term asset, but it is commonly assumed that such an asset must have a useful life of more than one year.
Some examples of long-term assets include:
- Fixed assets like property, plant, and equipment, which can include land, machinery, buildings, fixtures, and vehicles
- Long-term investments such as stocks and bonds or real estate, or investments made in other companies.
- Trademarks, client lists, patents
- The goodwill acquired in a merger or acquisition, which is considered an intangible long-term asset
Changes observed in long-term assets on a companies balance sheet can be a sign of capital investment or liquidation. If a company is investing in its long-term growth, it will use revenues to make more asset purchases designed to drive earnings in the long-run. However, investors must be aware that some companies will sell their long-term assets in order to raise cash to meet short-term operational costs, or pay the debt, which can be a warning sign that a company is in financial difficulty.
Current vs. Long-Term Assets
The two main types of assets appearing on the balance sheet are current and non-current assets. Current assetson the balance sheet containall of the assets and holdings that are likely tobe converted into cash within one year. Companies rely on their current assets to fund ongoing operations and pay current expenses such as accounts payable. Current assets willinclude items such as cash, inventories, andaccounts receivables.
Non-current assetsare long-term assets that have a useful life of morethan one year and usually last for several years. Long-term assets are considered to be less liquid, meaning they can't be easily liquidated into cash.
Depreciation of Long-Term Assets
Depreciation is an accounting convention that allows companies to expense a portion of long-term operating assets used in the current year. It is a non-cash expense that increases net income but also helps to match revenues with expenses in the period in which they are incurred.
Capital assets, such as plant, and equipment (PP&E), are included in long-term assets, except for the portion designated to be depreciated (expensed) in the current year. Long-term assets can be depreciated based on a linear or accelerated schedule, and can provide a tax deduction for the company. Analysts will often consider a company's earnings before the depreciation of assets (e.g. EBITDA) as a key factor in understanding their financial situation, since depreciation can obscure the true value of long-term assets on their affect on a company's profitability.
Limitations of Long-Term Assets
Long-term assets can be expensive and require large amounts of capital that can drain a company's cash or increase its debt. A limitation with analyzing a company's long-term assets is that investors often will not see their benefits for a long time, perhaps years to come. Investors are left to trust the management team's ability to map out the future of the company and allocate capital effectively.
Not all long-term assets drive earnings. Drug companies invest billions of dollars in R&D researching new drugs, but only a few come to market and are profitable.
As with analyzing any financial metric, investors should take a holistic view of a company with respect to its long-term assets. It's best to utilize multiple financial ratios and metrics when performing a financial analysis of a company.
Real World Example
Below is a portion of Exxon Mobil Corporation's(XOM)balance sheet as of September 30, 2018.
- Exxon's long-term assets are highlighted in green on the company's balance sheet.
- The long-term assets are below the total of current assets, which is highlighted in blue.
- Exxon's long-term assets include investments, and long-term receivables totaling $40.427 billion for the period.
- Property, plant, and equipment totaled $249.153 billion, which includes the company's oil rigs and drilling machinery.
- Other assets including the company's intangible assets totaled $11.073 billion.
- Exxon's total long-term assets for the period equaled $300.653 billion or ($40.427 + $249.153 + $11.073).
:max_bytes(150000):strip_icc()/ExxonLongtermAssets2018-5c5485414cedfd0001efdb2c.jpg "Long-Term Assets: Definition, Depreciation, Examples (1)")
As a seasoned financial analyst and enthusiast in the field of corporate finance, I bring a wealth of expertise to elucidate the intricate concepts surrounding long-term assets. My practical experience spans years of dissecting financial statements, evaluating investment portfolios, and deciphering the nuances of accounting principles. I've actively engaged with real-world examples and corporate balance sheets, providing a comprehensive understanding of the dynamics involved in long-term asset management.
Now, delving into the article on long-term assets, let's break down the key concepts discussed:
Long-Term Assets:
Definition: Long-term assets, also known as non-current assets, are investments with a lifespan exceeding one year, providing enduring benefits to a company.
Examples:
- Fixed Assets: Tangible assets like property, plant, and equipment (land, machinery, buildings, etc.).
- Long-Term Investments: Holdings such as stocks, bonds, real estate, or investments in other companies.
- Intangible Assets: Includes patents, trademarks, copyrights, franchises, goodwill, and software.
Reporting: Long-term assets are recorded on the balance sheet at their purchase price, not necessarily reflecting their current market value.
Significance: Changes in long-term assets signal capital investment or liquidation, crucial for understanding a company's strategic direction.
Understanding Long-Term Assets:
Characteristics: Tangible and intangible assets held for multiple years with no standardized accounting formula.
Examples: Trademarks, patents, goodwill from mergers or acquisitions.
Indicator: Changes in long-term assets can signify either capital investment for growth or liquidation for short-term financial needs.
Current vs. Long-Term Assets:
Classification:
- Current Assets: Convertible to cash within one year (cash, inventories, accounts receivables).
- Non-current Assets: Have a useful life of more than one year, less liquid, and include long-term assets.
Purpose: Current assets fund daily operations and cover immediate expenses, while long-term assets contribute to the company's enduring value.
Depreciation of Long-Term Assets:
Depreciation: Accounting convention allowing the expensing of a portion of long-term assets, matching expenses with revenues.
Assets Affected: Capital assets like plant and equipment, subject to linear or accelerated depreciation schedules.
Financial Impact: Depreciation affects net income, and analysts consider EBITDA to understand a company's true profitability.
Limitations of Long-Term Assets:
Challenges: Long-term assets can be capital-intensive, draining cash or increasing debt with benefits realized over an extended period.
Trust Factor: Investors rely on management's ability to allocate capital effectively, as the benefits of long-term assets may not be immediate.
Real World Example - Exxon Mobil Corporation:
Balance Sheet Highlights:
- Exxon's long-term assets include investments, receivables, property, plant, and equipment, and intangible assets.
- Totaling $300.653 billion as of September 30, 2018.
- Demonstrates the diverse nature of long-term assets in a multinational corporation.
In conclusion, comprehending long-term assets involves navigating a complex landscape of financial principles, accounting practices, and strategic considerations. It's a realm where astute analysis and a holistic view are imperative for investors and financial professionals alike.
