What Are Long-Term Assets?
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 other assets such as long-term investments or patents.
Long-term assets are reported on the balance sheet and are usually recorded at the price at which they were purchased and do not always reflect the current value of the asset.
How to Calculate and Identify Long-Term Assets
- There is no accounting formula that identifies an asset as being a long-term asset. Long-term assets are listed on the balance sheet.
- A long-term asset must have a useful life of more than one year.
- A long-term asset is any asset that doesn't meet the definition of being a current asset. A current asset is an asset that can be easily converted to cash within one year.
What Do Long-Term Assets Tell You?
Long-term assets are listed on the balance sheet, which provides a snapshot in time of the company's assets, liabilities, and shareholder equity. The balance sheet equation is "assets equals liabilities plus shareholder's equity" because a company can only fund the purchase of assets with capital from debt and shareholder's equity.
Current Assets versus Long-Term Assets
The two main distinctions between assets on the balance sheet are current and non-current assets. As stated earlier, current assets are assets used in the short-term. Current assets on the balance sheet contain all of the assets that are likely to be converted into cash within one year. Companies rely on its current assets to fund ongoing operations and pay current expenses. Current assets include cash, inventory, and accounts receivables.
Noncurrent assets are a company’s long-term investments or assets that have a useful life of more than one year and usually last for several years. Noncurrent assets are considered illiquid, meaning they can't be easily liquidated into cash. Long-term assets are considered noncurrent assets and the two terms are used interchangeably.
Changes in Long-Term Assets
Changes in long-term assets can be a sign of capital investment or liquidation. If a company is investing in its long-term health, it will likely use capital for asset purchases designed to drive earnings in the long-term. However, investors must be aware that some companies sell their long-term assets to raise cash to meet short-term operational costs, or pay debt, which can be a warning sign that a company is in financial difficulty.
Depreciation and Long-Term Assets
Capitalized property, plant, and equipment (PP&E) are also included in long-term assets, except for the portion designated to be expensed or depreciated in the current year. Capitalized assets are long-term operating assets that are useful for more than one period. Firms do not have to deduct the entire cost of the asset from net income in the year it is purchased if it will give value for more than one year. This is due to an accounting convention called depreciation.
Depreciation is an accounting convention that allows companies to expense an estimate for the portion of long-term operating assets used in the current year. It is a non-cash expense that inflates net income but helps to match revenues with expenses in the period in which they are incurred.
- 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.
Examples of Long-Term Assets
Long-term assets are investments in a company that will benefit the company for many years. Long-term assets can include tangible assets, which can be touched, or intangible assets which can't be touched such as a company's trademark.
Examples of long-term assets include:
Real World Example of Long-Term Assets
- 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).
The Difference Between Fixed Assets and Long-Term Assets
Fixed assets are noncurrent assets meaning the assets have a useful life of more than one year. Fixed assets include property, plant, and equipment (PP&E) and are recorded on the balance sheet. Fixed assets are also referred to as tangible assets, meaning they're physical assets.
Fixed assets are just one type of long-term assets. Long-term assets include fixed assets but also include intangible assets as well. In short, long-term assets is an umbrella term to cover all assets that have a useful life of more than one year in which fixed assets are listed under that umbrella.
Limitations of Long-Term Assets
Long-term assets are investments that can require large amounts of capital and as a result, can increase a company's debt or drain their cash. A limitation in analyzing long-term assets is that investors won't see the benefits for a long time, perhaps years. Investors are left to trust the company's executive management team's ability to map out the future of the company and allocate capital effectively.
Not all investments drive earnings. Drug companies invest billions of dollars in researching new drugs, but only a few come to market and are profitable.
As with analyzing any financial metric, investors must take a holistic view of a company when analyzing its long-term assets. The long-term outlook for a company can depend on its management team, its competitive advantage, financial performance, macroeconomic factors, and its value proposition. It's best to utilize multiple financial ratios and metrics when performing financial analysis on a company.