Tangible Assets

Assets with physical form and value

What are Tangible Assets?

Tangible assets are assets with a physical form and hold value. Examples include property, plant, and equipment. Tangible assets are seen or felt and can be destroyed by fire, natural disaster or an accident.  Intangible assets, on the other hand, lack a physical form and consists of intellectual property, trademarks, patents, etc.

 

tangible asset vs intangible asset

 

Types of Tangible Assets

  1. Fixed assets or hard assets are those assets that are held by a business for a long period of time and they cannot be easily converted into cash. Fixed tangible assets are depreciated over a period of time.
  2. Current assets or liquid assets are those assets that can easily be converted into cash and are there in business for a short period of time, generally less than or equal to one year. The liquidity of current assets is more than that of fixed assets.

 

Tangible Assets

 

Characteristics of Tangible Assets

  • They come in physical form, which means they can be seen, felt or touched.
  • They are depreciated over a period of time.
  • They possess a scrap or residual value.
  • They can be used as collateral to obtain loans.
  • They are used in the daily operations of the business.

 

Business Importance of Tangible Assets

  • Depreciation – Depreciation on tangible assets is a noncash expenditure. It means that it is an expenditure that helps the company to get a tax benefit but in reality, there is no cash outflow from the business.
  • Liquidity – As tangible assets can easily be converted into cash, they provide liquidity to the business and thus, reduce risk. As long as the value of the assets owned by a business is more than money risked, a business will remain safe and solvent.
  • Collateral Security – The assets can be used as collateral security to easily obtain loans.

 

In addition to the points outlined above, tangible assets play an important role in the capital structure of a company. The assets are positively related to leverage – companies with more tangible assets utilize debt financing more heavily. The assets are easier to collateralize and does not lose a lot of value when companies face financial distress. Therefore, it is observed that companies with fewer tangible assets tend to borrow less from creditors and companies with more assets tend to borrow more from creditors.

 

Valuing Tangible Assets

 

1. Appraisal Method

Under the appraisal method, an appraiser is hired to determine the true fair market value of a company’s assets. The asset appraiser will assess the current condition of the assets, including the degree of obsolescence and level of wear and tear, and then the appraiser will compare these values to the values such assets can fetch in the open market.

 

2. Liquidation Method

The assets can easily be converted into cash. Thus, it is important for a company to know the minimum value it would receive from a quick sale or liquidation. An assessor is hired and determines the value an auction house, equipment seller or other bulk asset buyers would be willing to pay for such category of an asset owned by the company.

 

3. Replacement Cost Method

The replacement cost method is generally used by an insurer to calculate the value of the asset for insurance purposes. It helps to determine how much it would cost to replace the asset.

 

Net Tangible Assets

Net tangible asset is defined as the difference between a company’s fair market value of tangible assets and fair market value of all liabilities where liabilities represent the outside liability of the firm. In other words, it is the total assets at fair value less intangible asset less total or outside liability at fair value.

 

Importance of Net Tangible Assets

  • It helps to find if the market share price of a company is overvalued or undervalued. It can be done by comparing the value of net tangible asset per share to that of the current share price of the company.
  • A company whose value of net tangible assets is high has low risk in terms of liquidity.
  • A high net tangible assets value can serve as a cushion against uncertainty that can take place in the market and render the company’s business obsolete.

 

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