What is an 'Asset Base'

An asset base refers to the underlying assets giving value to a company, investment or loan. The asset base is not fixed. It will appreciate or depreciate according to market forces, or increase and decrease as a company sells or acquires new assets. Although it is completely normal for a company to make changes to its asset base periodically by buying and selling assets, large swings in asset base will affect the company's valuation and can be a red flag for analysts. Lenders use physical assets as a guarantee that at least a portion of money lent can be recouped through the sale of the backed asset in the case that the loan itself cannot be repaid.

BREAKING DOWN 'Asset Base'

With an investment, for example, the price of a commodity used as the asset base of derivative can increase or decrease rapidly, changing the price that investors are willing to pay for it. With a loan, the value of a home might increase or decrease over time, affecting the underlying collateral in a mortgage. Margin loans are particularly sensitive the underlying value of the collateral, as pledged securities whose value fluctuate with the market are often used for this purpose. A company's asset base is included in its valuation, and includes tangible, hard assets such as property, plant, equipment and inventory.

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