Financial analysis is a technique that many investors who plan to invest for the long term use to identify the right companies. It involves looking into the various financial statements of a company to ensure that its financial performance is adequate enough to warrant an investment.
If you adopt this approach, when analyzing the financials, you’re likely to come across two main subcategories of assets listed in the balance sheet of a company – tangible assets and intangible assets. If you’re wondering what these subcategories represent and what the tangible and intangible assets differences are, here’s what you should know.
What are tangible assets?
As the name itself signifies, the assets that possess a physical form are termed as tangible assets. Since these assets can be seen, felt, and touched, many also refer to them as ‘hard assets.’ Additionally, tangible assets have a specific and fixed monetary value associated with them.
For instance, manufacturing equipment, plant and machinery, land, buildings, and vehicles, among others, are all examples of tangible assets. Usually, these assets are directly involved in the production of a company’s goods and services. But they can also include computers and other peripheral computer accessories like printers that may or may not be directly involved in the production.
What are intangible assets?
The assets that do not possess any sort of physical form are termed as intangible assets. These assets exist only on paper and cannot be seen, felt, or touched. However, they do have a distinct monetary value associated with them. Unlike tangible assets, the monetary value of intangible assets cannot be easily determined or quantified, since their value is not fixed or specific.
For instance, a company’s goodwill, trademarks, patents, brand name, logo, among others are all examples of intangible assets. Although these assets are not directly involved in the production of a company’s goods and services, they’re still a source of revenue to the company.
What are the key differences between tangible and intangible assets?
Now that you know what these two categories of assets are, let’s take a good look at the tangible and intangible assets differences in order to better understand them.
As you’ve already seen above, the primary tangible and intangible assets difference lies in their form. Tangible assets have a physical form, whereas intangible assets exist only on paper and do not possess any physical attributes.
Tangible assets have a fixed monetary value associated with them. Meanwhile, intangible assets do not possess any such finite value. For instance, the value of a tangible asset like a vehicle has a finite monetary value. But the value of an intangible asset such as a patent or a trademark is not finite.
Determination of value
Continuing on from the previous point, determining the value of a tangible asset is quite easy. For example, to determine the value of a tangible asset like a mobile phone, all that you need to do is find out the cost of a similar mobile phone. However, determining the value of an intangible asset like a patent or a trademark is quite hard since a similar intangible asset may not always be available in the market.
Most tangible assets usually have fixed lifespans beyond which they may simply cease to work or even exist. For instance, tangible assets like laptops or computer equipment may only work until a certain point in time. Similarly, raw materials and inventories of manufacturing companies cease to exist once they’re used in the manufacturing process to produce finished goods. With intangible assets, however, there’s absolutely no lifespan associated with them. Since they exist merely on paper, they enjoy a virtually indefinite lifespan and do not expire.
Another minor tangible and intangible assets difference is the way they are accounted for by companies. Tangible assets are depreciated, while intangible assets are amortized. Depreciation is the practice of accounting for the decrease in the value of a tangible asset over a period of time due to wear and tear. Amortization is the practice of spreading the value of an intangible asset over a period of time.
Since the value of a tangible asset can be easily determined, it is extremely easy to liquidate such an asset. But with intangible assets, the liquidation process is much harder due to the non-availability of data to determine their value. Additionally, not all intangible assets may be of use to another company. For instance, think of goodwill or customer loyalty. This makes liquidation even tougher.
Now that you’re aware of the tangible and intangible assets differences, there’s also another key point that you should note. In their balance sheets, companies usually sub-classify these two categories of assets into ‘current’ and ‘noncurrent’ assets depending on whether the assets have a short-term or a long-term impact on the business. Knowing these bits of information, you’ll find it easier to make sense of the financials of a company.