Understanding Hard Assets
A hard asset refers to a tangible asset or resource possessing fundamental value. Examples of hard assets include a fleet of delivery trucks, land, real estate, and commodities. Businesses acquire hard assets to enhance production, boost revenues, and act as a safeguard against losses from soft assets. While typically providing security, hard assets might sometimes decrease in value alongside soft asset declines.
Key Takeaways
- A hard asset is a tangible or physical item or resource owned by an individual or company.
- Frequently, the value of hard assets shifts oppositely to that of soft assets, offering a buffer against losses.
- Hard assets can be long-term, such as machinery, or short-term, like raw materials or inventory.
The Importance of Hard Assets
Hard assets are generally fixed assets, aiding in the production of a company’s goods and services over the long term. These typically have a lifespan exceeding one year and are included under property, plant, and equipment on a company’s balance sheet.
Examples of hard assets include:
- Buildings
- Vehicles (trucks, cars)
- Machinery and equipment
- Office furniture
- Machinery
However, hard assets can also be short-term, known as current assets, which are usually consumed within a year. For example, inventory or raw materials qualify as hard assets for manufacturing companies.
Investing in Hard Assets
Hard assets representing fixed assets typically involve substantial capital investment decisions activated by a company’s executive team. These investments tend to necessitate significant cash or capital, leading to long-term funding resolutions. Sources of funds include banks, venture capital, corporate bonds, and new stock issuance. A capital investment in hard assets, like a new manufacturing plant, indicates a plan to use the facility for revenue generation over many years.
Valuing Hard Assets
Hard assets hold particular value as they can be utilized for producing or purchasing other goods or services, or sold to generate cash during financial challenges. In assessing a company’s intrinsic value—which involves computing its worth based on cash flow, assets, future revenues, and cost structures—hard assets play a critical role as sellable properties in financially distressing situations.
Hard Assets vs. Intangible Assets
Hard assets contrast with intangible assets—non-physical, long-term assets. Examples of intangible assets include:
- Company brands
- Investments in securities
- Trademarks
- Patents
- Copyrights
- Franchises
Technology companies often possess numerous intangible assets, holding patents and substantial investments in research and development. Conversely, oil-producing companies maintain many hard assets, such as drilling equipment and rigs.
Real-World Example: Hard Assets in Action
Consider Ford Motor Company, which seeks to invest in new machinery for their assembly lines and procure raw materials like steel and aluminum for rivets. Here, the assembly machinery represents a long-term hard asset, while the steel and aluminum are short-term current assets, intended for quick turnover within a year. Additionally, any patents associated with the equipment are categorized as intangible assets."
Related Terms: intangible assets, capital investment, balance sheet, intrinsic value, current assets, fixed assets.
