What Is Property, Plant, and Equipment (PP&E)
Property, plant, and equipment (PP&E) are long-term assets vital to business operations and not easily converted into cash. Property, plant, and equipment are tangible assets, meaning they are physical in nature or can be touched. The total value of PP&E can range from very low to extremely high compared to total assets.
Property, Plant and Equipment (PP&E)
The Formula for PP&E
How To Calculate PP&E
- Add the amount of gross property, plant, and equipment, which is listed on the balance sheet, to capital expenditures.
- Subtract accumulated depreciation from the result. For review, accumulated depreciation is the total amount of a company's cost that has been allocated to depreciation expense since the asset was put into use. Depreciation is the process of allocating the cost of a tangible asset over its useful life and is used to account for declines in value.
- In most cases, companies will list their net PP&E on their balance sheet when reporting financial results, so the calculation has already been done.
What Does PP&E Tell You?
Property, plant, and equipment are also called fixed assets, meaning they are physical assets that a company cannot easily liquidate.
PP&E fall under the category of noncurrent assets, which are the long-term investments or assets of a company. Noncurrent assets like PP&E have a useful life of more than one year. Typically, noncurrent assets last many years and are considered illiquid, meaning they can't be easily liquidated into cash. Noncurrent assets are the opposite of current assets. Current assets are short-term assets, which are assets on the balance sheet that are likely to be converted into cash within one year.
Investing in PP&E
A company investing in PP&E is a good sign for investors. A fixed asset is a sizable investment in a company's future. Purchases of PP&E are a signal that management has faith in the long-term outlook and profitability of its company. PP&E are physical, tangible assets expected to generate economic benefits and contribute to revenue for many years.
Investment in PP&E is also called a capital investment. Industries or businesses that require a large number of fixed assets like PP&E are described as capital intensive.
PP&E may be liquidated when they are no longer of use or when a company is experiencing financial difficulties. Of course, selling property, plant, and equipment to fund business operations is a signal that a company might be in financial trouble. It is important to note that regardless of the reason a company has sold some of its property, plant, or equipment, it's unlikely the company didn't realize a profit from the sale.
Accounting for PP&E
PP&E is recorded on a company's financial statements, specifically on the balance sheet. PP&E is initially measured according to its historical cost, which is the actual purchase cost and the costs associated with bringing assets to its intended use.
For example, when purchasing a building for retail operations, the historical cost could include the purchase price, transaction fees, and any improvements made to the building to bring it to its destined use. The value of PP&E is adjusted routinely as fixed assets generally see a decline in value due to use and depreciation. Amortization is used to devalue these assets as they are used, but land is not amortized because of its potential to appreciate in value. Instead, it is represented at its current market value. The balance of the PP&E account is remeasured every reporting period, and, after accounting for historical cost and amortization, is called the book value. This figure is reported on the balance sheet.
- Property, plant, and equipment are also called fixed assets, meaning they are physical assets that a company cannot easily liquidate.
- PP&E are long-term assets vital to business operations and the long-term financial health of a company.
- Purchases of PP&E are a signal that management has faith in the long-term outlook and profitability of its company.
Examples of PP&E
An example of PP&E includes plant and machinery owned by a manufacturer. Property, such as real estate, is also considered PP&E and a noncurrent asset since it usually takes more than one fiscal year to sell.
Let's say a company has a gross PP&E of $8 million and has recorded so far accumulated depreciation of $3 million. The company is also expanded its operations and has capital expenditures of $1.5 million. We would calculate the net PP&E as follows:
The net PP&E for the company would equal $3.5 million or ($8 million + $1.5 million) - $3 million. As stated earlier, many companies will already have calculated the net PP&E when they report it on their balance sheet for the period.
Real World Example of PP&E
We can see that Exxon recorded $249.153 billion in net property, plant, and equipment for the period ending September 30, 2018.
When compared to Exxon's total assets of over $354 billion for the period, PP&E made up the vast majority of total assets. As a result, Exxon would be considered a capital intensive company. Some of the company's fixed assets include oil rigs and drilling equipment.
The Difference Between PP&E and Noncurrent Assets
Although PP&E are noncurrent assets or long-term assets, not all noncurrent assets are property, plant, and equipment.
Intangible assets are nonphysical assets, such as patents and copyrights. They are considered to be noncurrent assets because they provide value to a company but cannot be readily converted to cash within a year. Long-term investments, such as bonds and notes, are also considered noncurrent assets because a company usually holds these assets on its balance sheet for more than one fiscal year. PP&E refers to specific fixed, tangible assets whereas noncurrent assets are all of the long-term assets of a company.
The Limitations of PP&E
PP&E are vital to the long-term success to many companies, but they are capital intensive. Companies sometimes sell a portion of their assets to raise cash and boost their bottom line or net income. As a result, it's important to monitor a company's investments in PP&E and any sale of its fixed assets.
As stated earlier, PP&E are tangible assets or physical assets. PP&E analysis doesn't include intangible assets such as a company's trademark. For example, Coca-Cola's (KO) trademark and brand name represent sizable intangible assets. If investors were to only look at Coca-Cola's PP&E, they wouldn't be seeing the true value of the company's assets. PP&E only represents one portion of a company's assets. Also, for companies with few fixed assets, PP&E has little value as a metric.