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Property, plant, and equipment (PP&E) are long-term tangible assets vital to business operations. These assets are not easily converted into cash. The overall value of a company's PP&E can range from very low to extremely high compared to its total assets.
Property, plant, and equipment are also called fixed assets. They are physical assets that a company cannot easily liquidate or sell. PP&E assets are considered noncurrent assets, or long-term investments. Noncurrent assets like PP&E have a useful life of at least one year. Types of PP&E include:
Noncurrent assets are the opposite of current assets. Current assets are short-term assets like inventory and are likely to be converted into cash within one year.
PP&E is recorded on a company's balance sheet. PP&E is measured using historical cost, or the actual purchase cost. 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 use.
The gross value of PP&E is adjusted for use and depreciation. Depreciation allocates the cost of a tangible asset over its useful life and accounts for declines in value. The total amount allocated to depreciation expense over time is called accumulated depreciation. Land assets are not depreciated because of their potential to appreciate and are always represented at their current market value.
The PP&E account is remeasured every reporting period, and, after accounting for historical cost and depreciation, is defined as book value. This figure is reported on the balance sheet. To calculate PP&E, add the gross property, plant, and equipment, listed on the balance sheet, to capital expenditures. Next, subtract accumulated depreciation. Companies commonly list their net PP&E on their balance sheet when reporting financial results.
Net PPE = Gross PPE + Capital Expenditures − AD where: AD = Accumulated depreciation \begin &\text=\text+\text-\text\\ &\textbf\\ &\text=\text \end Net PPE = Gross PPE + Capital Expenditures − AD where: AD = Accumulated depreciation
Below is a portion of Exxon Mobil Corporation's (XOM) quarterly balance sheet from Sept. 30, 2018. Exxon recorded $249.153 billion in net property, plant, and equipment for the period ending Sept. 30, 2018.
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.
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Investment analysts and accountants use PP&E to determine if a company is financially sound. A company investing in PP&E is a good sign for investors. Purchases often signal that management expects long-term profitability of its company. Investment in PP&E is also called a capital investment. Industries or businesses that require extensive fixed assets like PP&E are described as capital intensive.
PP&E may be liquidated when a company is experiencing financial difficulties. Selling property, plant, and equipment to fund business operations may signal financial trouble. Companies can also borrow from their PP&E as a floating lien, meaning the equipment can be used as collateral for a loan.
PP&E assets help generate economic benefits and contribute to revenue. Purchases of PP&E are a signal that management has faith in the long-term outlook of its company. Although PP&E are vital to the long-term success of many companies, they are also capital intensive. Companies sometimes sell assets to raise cash or net income. Analysts monitor a company's investments in PP&E and any sale of its fixed assets to help assess financial difficulties.
Since PP&E are tangible 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 see the true value of the company's assets. PP&E only represents one portion of a company's assets.
PP&E are noncurrent assets or long-term assets. Noncurrent assets include intangible assets, such as patents and copyrights. 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 on its balance sheet for more than one fiscal year.
Equipment, machinery, buildings, and vehicles, are commonly described as property, plant, and equipment (PP&E). These items labeled are tangible, fixed, and not easy to liquidate. PP&E is listed on a company's balance sheet minus accumulated depreciation. PP&E represents assets that are key to the functionality of a business.
