What Is a Non-Operating Asset?
A non-operating asset is a class of assets that are not essential to the ongoing operations of a business but may still generate income or provide a return on investment (ROI). These assets are listed on a company's balance sheet along with its operating assets, and they may or may not be broken out separately.
- Non-operating assets are assets that are not considered to be part of a company's core operations.
- A company's non-operating assets may be unused land, spare equipment, investment securities, and so on.
- Income from non-operating assets contributes to the non-operating income of a company. These assets and any income from them are usually omitted from the financial analysis of a company's core business.
- Non-operating assets can function as a way to diversify risk and revenues.
Understanding a Non-Operating Asset
Non-operating assets are also known as redundant assets because they do not support operations and are therefore considered to be redundant and expendable if a company needs to cash them in. That said, companies hold non-operating assets for several reasons. For example, a company may own a parcel of land assessed at $300,000 in value but has no plans to build on the property for at least five years. Until it is used, the land is considered to be a non-operating asset.
Common non-operating assets include unallocated cash and marketable securities, loans receivable, idle equipment, and vacant land. The correct identification of non-operating assets is an important step in the valuation process because these can often be overlooked by analysts and investors. Furthermore, analysis based on a cash flows approach will not capture the value of non-operating assets. These assets have to be valued separately and added to the operating value of the business.
Non-operating assets may be assets related to a closed portion of the business. In this case, the company can choose to hold onto the assets with the intention of selling or using them in the future. For example, imagine a business owns several retail locations and it closes one of its locations. The business operations in that building have ceased and the company still owns the building. Because the building is no longer instrumental in the business's day-to-day operations, it is labeled as non-operating. However, the building still holds value that could be tapped into in the future, so it is also considered an asset.
Using Non-Operating Assets to Diversify Risk
In other cases, non-operating assets can be used to diversify operational risks. For example, a business may own some real estate or patents simply as cash investments. Although these assets are not tied to the business's operations, the company may still earn some revenue from them. If the business loses money through its operations, these non-operating assets can provide diversification and act as a financial backup.
Non-Operating Assets and Non-Operating Income
Non-operating income refers to revenue an organization earns that is not connected to its core operations. In some cases, non-operating income comes from non-operating assets. To continue with the above example, if the business rents out its empty retail location, the money it collects in rent is non-operating income.
Similarly, if a company has investments that are not related to its operations, the returns it earns on those investments are classified as non-operating income. In recent years, large corporations realized the risk of being disrupted by rising startups, so they created corporate venture capital arms that invest in new ideas that are not necessarily related to their operations where they own assets and generate income as a diversification tool.
However, non-operating income does not always come from non-operating assets. It may also include gains from foreign exchanges or other forms of peripheral income such as a one-time gain on investment securities. Non-operating assets may also generate liabilities for the company holding them. For example, a company holding onto unused land will have liability exposure in the form of taxes due, interest owed, or lawsuits generated by accidents on that property.
Non-Operating Assets and Stock Valuation
Non-operating assets are usually treated separately from operating assets when evaluating a company or its stock. The value of non-operating assets does count toward the total worth of the company, however, their value is excluded from financial models that estimate the future growth or profit earning potential of the core business segments. Although non-operating assets may bring revenue into a company, they are not used to generate core revenue.