What Are Long-Term Assets?
Long-term assets are assets or other investments made by a firm that will benefit the company for several years. Also known as non-current assets, 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 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.
- 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 assets on the balance sheet contain all of the assets and holdings that are likely to be 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 will include items such as cash, inventories, and accounts receivables.
Non-current assets are the long-term assets that have a useful life of more than 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 cam 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
- 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).