What it means
Tangible assets are the physical backbone of many businesses. A factory has machines and buildings, a shop has stock and fittings, and a delivery firm has vehicles.
These items sit on the balance sheet at their cost less any accumulated depreciation, which is the gradual write-off of an asset's value over its useful life. Tangible assets matter because they can often be sold to repay debts.
Lenders therefore like them as security, and a company with plenty of tangible assets can usually borrow more cheaply than one whose value rests on ideas and reputation. In a liquidation, tangible assets are normally the first source of repayment.
The category is usually split into fixed assets, which are kept for years such as property and equipment, and current assets, which are turned into cash within a year such as inventory. Some definitions of tangible assets include cash and receivables because they are measurable and realisable.
Others restrict the term to physical items, so the context matters, and an analyst should always check which definition a report is using. Tangible assets also need ongoing care.
They wear out, need repairs, can become obsolete and must be insured. The cost of maintaining them is part of the real cost of operating the business.
Tangible assets also differ in how easily they can be turned into cash. A lorry has a ready second-hand market, while a specialised machine built for one product may have few buyers.
Lenders therefore apply different percentages to different types of asset, lending more against stock and vehicles than against bespoke equipment. When analysts want to judge the hard value behind a company, they subtract intangible assets from total assets.
This gives a more conservative measure of what the business owns, which is useful when judging whether a company could cover its debts if the brand lost its value.
In practice
Real-world examples.
Example
A bakery chain owns ovens, delivery vans, shop fittings and flour stocks worth $1,800,000. When it applies for a loan, the bank values these tangible assets and lends against part of their value. The bakery's brand name is not counted, even though customers know it well and it helps generate sales.
Example
A software company has almost no physical items beyond laptops and office furniture. Its value lies in its code and customer relationships, which are intangible. A lender to this company relies on its cash flow, not on assets it could sell.
Example
A construction firm in financial difficulty sells excavators, cranes and unused land to repay a bank loan. These tangible assets raise $6,500,000 in cash. The sale reduces the firm's debt but also its ability to take on new projects, so management has to weigh the lower interest bill against the lost capacity.
Formula
Calculation
Tangible assets = total assets - intangible assets
Tangible share of assets = tangible assets / total assets x 100
A company reports total assets of $12,000,000. This includes goodwill of $2,500,000, patents of $1,000,000 and trademarks of $500,000. Intangible assets total 2,500,000 + 1,000,000 + 500,000 = $4,000,000. Tangible assets = 12,000,000 - 4,000,000 = $8,000,000, which is 8,000,000 / 12,000,000 = 66.7% of total assets.Case study
Seen in the real world.
Ridgeway Metalworks is an illustrative, fictional manufacturer that wanted a $4,000,000 loan to expand. Its balance sheet showed total assets of $9,000,000, including $1,200,000 of goodwill from a past acquisition.
The bank looked only at tangible assets of $7,800,000 and applied a lending limit of 50% of that figure. The maximum loan on this basis was 7,800,000 x 0.50 = $3,900,000, slightly below the amount requested.
The illustrative outcome was that Ridgeway reduced its request to $3,800,000, which fitted within the limit, and the loan was approved. The finance director learned that goodwill counts for nothing in a security valuation, and that the bank cares about what it could actually sell.
Watch out
Common mistakes.
- Treating all assets on the balance sheet as equally easy to sell, when goodwill and brands cannot be sold separately.
- Using the book value of tangible assets as their sale value, when equipment often sells for less than its recorded value.
- Ignoring depreciation, which steadily reduces the recorded value of tangible assets year after year and affects how much a lender will advance.
Questions
People also ask.
Is cash a tangible asset?
It depends on the definition: strictly it is a financial asset, but many analysts include it among tangible assets because it has a clear, measurable value.
Are tangible assets always more valuable than intangible ones?
No, many modern companies derive most of their value from intangible assets such as software, brands and customer relationships, even though those do not appear as physical items.
Why do lenders prefer tangible assets?
Because they can be sold and valued independently, they give the lender a more reliable fallback if the borrower fails.
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