What is property, plant, and equipment?

Property, plant, and equipment are physical or tangible assets that are long-term assets that typically have a life of more than one year. Examples of property, plant, and equipment (PP&E) include:

  • Vehicles like trucks
  • Office furniture
  • Machinery
  • Buildings

Property, plant, and equipment assets are also called fixed assets, which are long-term physical assets. Industries that are considered capital intensive have a significant amount of fixed assets, such as oil companies, auto manufacturers, and steel companies. 

Characteristics of Property, Plant and Equipment

  • Fixed assets have a useful life assigned to them meaning a set number of years the assets will have economic value to the company.
  • Fixed assets have a salvage value, which is the value remaining at the end of the asset's life. Salvage value is also called scrap value.
  • Fixed assets undergo depreciation, which divides the cost of fixed assets, expensing them over their useful lives. Depreciation helps a company avoid a significant cash outlay in the year the asset is purchased. Depreciation also helps spread the asset's cost out over a number of years allowing the company to earn revenue from the asset.

How Property, Plant and Equipment Impacts Investors

Companies that are expanding may decide to purchase fixed assets to invest in the long-term future of the company. These purchase are called capital expenditures and significantly impact the financial position of a company. Whether a portion of cash is used, or the asset is financed by debt or equity, how the asset is financed has an impact on the financial viability of the company.

It's important to know where a company is allocating its capital, whether the company is making capital expenditures, and how the company plans to raise the capital for their projects. If new equity is issued, the stock price might decline due to dilution of the shares. If cash is used, the company may be unable to pay dividends in future quarters. If the company obtains financing from a bank or private equity firm, the company will have debt-servicing costs associated with the additional long-term debt.