Broadly speaking, the assets on a company's balance sheet may generally be classified into two categories: current assets and fixed assets. This article explains the difference between these two silos and highlights the significance of each group.
- The assets on a company's balance sheet are generally classified as either current assets or fixed assets.
- Current assets are highly liquid and may be easily converted into cash in under one year.
- Fixed assets are long-term assets companies use to finance the production of goods and services, including property, plant, and equipment (PP&E).
- Investors may be more comfortable investing in companies with higher ratios of current assets because these businesses can more easily generate the cash needed to keep their operations running smoothly.
Current assets are highly liquid, and consequently may be easily converted into cash in less than one year. Current assets are typically used to finance operational expenses needed to fund day-to-day operations. Current assets may include:
- Cash and cash equivalents like certificates of deposit
- Marketable securities like equity or debt securities
- Accounts receivable, or money owed by customers to the company for sales that typically must be paid within 90 days
- Inventory, including finished goods as well as raw materials
- Prepaid expenses
Fixed assets are long-term assets a company uses to finance the production of its goods and services. Fixed assets have useful lives greater than one year and are listed on the balance sheet as property, plant, and equipment (PP&E). Fixed assets are often referred to as tangible assets because they have physical properties that can be seen and touched. Fixed assets can include:
- Vehicles like company cars and delivery trucks
- Office furniture
- Office Buildings
Striking a Balance Between Fixed and Current Assets
Many wonder if companies should strive to create a balance between their current assets and their fixed assets. The answer to this question entirely depends on the type of industry in question. For example, Software as a service (Saas) businesses traditionally have higher amounts of current assets in the form of surplus cash, mainly due to the fact that their products are sold online, and their transactions are swiftly conducted--often electronically. The only fixed assets with companies like these include office furniture and computer equipment.
Risk-averse investors tend to favor companies with higher ratios of current assets, because such businesses will always have the cash on hand needed to pay salaries, move product, and keep the wheels of business rolling. This gives investors greater comfort than they might take from investing in fixed asset-heavy businesses, who may have to halt operations because it takes them a year or more to generate emergency cash during stressful periods.
On the other hand, there are certain advantages to having high levels of fixed assets. Namely, these assets undergo depreciation, letting companies expense those costs over their useful lives. This helps those companies avoid major losses during years they purchase big-ticket physical items, by letting them spread out costs over several years.
The Bottom Line
Current assets can be converted into cash quickly, while fixed assets are long-term assets that a company relies on to generate long-term growth. (For more on assets, please read "How Do the Income Statement and Balance Sheet Differ?")