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. Companies hold non-operating, or redundant, assets for several reasons. An example might be a company owns a parcel of land assessed at $300,000 in value, but which has no plans to build on the property for at least five years. Until it is used, the asset is non-operating, although it is intended be utilized in the future.
Common non-operating assets include underutilized cash and marketable securities, loans receivable, unutilized equipment or that in need of repair, 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 redundant assets. These assets have to be valued separately and added to the operating value of the business.
BREAKING DOWN Non-Operating Asset
Also known as redundant assets, non-operating assets may be assets related to a closed portion of the business, which may be holding onto them 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. However, it 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, but because it still holds value, it is also considered an asset.
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 or return 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 is non-operating income.
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. Unused land may also generate liabilities in the form of taxes due, interest owed or lawsuits generated by accidents on that property.
Non-Operating Assets and Company Evaluation
Non-operating assets are often treated separately than operating assets when evaluating a company or its stock. The value of non-operating assets counts 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, simply because, though non-operating assets may bring revenue into a company, they are not used to generate core revenue.