PROPERTY, PLANT, AND EQUIPMENT

What Is Property, Plant, and Equipment – PP&E?

Property, plant, and equipment (PP&E) are long-term assets vital to business
operations and not easily converted into cash. Property, plant, and
equipment are tangible assets, meaning they are physical in nature or can be
touched. The total value of PP&E can range from very low to extremely high
compared to total assets. It is important to note when calculating equity.

PP&E Formula and Calculation

Analyst and others will use the PP&E of a company to determine if it is on a
sound financial footing and utilizing funds in the most efficient and effective
manner.

\begin{aligned} &\text{Net PPE}=\text{Gross PPE}+\text{Capital

Expenditures}-\text{AD}\\ &\textbf{where:}\\
&\text{AD}=\text{Accumulated depreciation} \end{aligned}
Net PPE=Gross PPE+Capital Expenditures−ADwhere:AD=Accumulated
depreciation
To calculate PP&E add the amount of gross property, plant, and equipment,
listed on the balance sheet, to capital expenditures. Next, subtract accumulated
depreciation from the result.

As a reminder, accumulated depreciation is the total amount of a company's cost

allocated to depreciation expense since the asset was put into
use. Depreciation is the process of allocating the cost of a tangible asset over its
useful life and is used to account for declines in value. In most cases, companies
will list their net PP&E on their balance sheet when reporting financial results, so
the calculation has already been done.

Investing in PP&E
A company investing in PP&E is a good sign for investors. A fixed asset is a
sizable investment in a company's future. Purchases of PP&E are a signal that
management has faith in the long-term outlook and profitability of its company.
PP&E are physical, tangible assets expected to generate economic benefits and
contribute to revenue for many years.

Investment in PP&E is also called a capital investment. Industries or businesses

that require a large number of fixed assets like PP&E are described as capital
intensive.

Liquidating PP&E
PP&E may be liquidated when they are no longer of use or when a company is
experiencing financial difficulties. Of course, selling property, plant, and
equipment to fund business operations is a signal that a company might be in
financial trouble. It is important to note that regardless of the reason a company
has sold some of its property, plant, or equipment, it's unlikely the company didn't
realize a profit from the sale.

Accounting for PP&E

PP&E is recorded on a company's financial statements, specifically on the
balance sheet. PP&E is initially measured according to its historical cost, which is
the actual purchase cost and the costs associated with bringing assets to its
intended use.

For example, 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 its destined use. The value of PP&E is adjusted
routinely as fixed assets generally see a decline in value due to use and
depreciation.

Amortization is used to devalue these assets as they are used. However, the
land is not amortized because of its potential to appreciate in value. Instead, it is
represented at its current market value. The balance of the PP&E account is
remeasured every reporting period, and, after accounting for historical cost and
amortization, is called the book value. This figure is reported on the balance
sheet.

PP&E vs. Noncurrent Assets

Although PP&E are noncurrent assets or long-term assets, not all noncurrent
assets are property, plant, and equipment.

Intangible assets are nonphysical assets, such as patents and copyrights. They
are considered to be noncurrent assets because 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 assets on its balance sheet for more
than one fiscal year. PP&E refers to specific fixed, tangible assets whereas
noncurrent assets are all of the long-term assets of a company.

The Limitations of PP&E

PP&E are vital to the long-term success of many companies, but they are capital
intensive. Companies sometimes sell a portion of their assets to raise cash and
boost their bottom line or net income. As a result, it's important to monitor a
company's investments in PP&E and any sale of its fixed assets.
As stated earlier, PP&E are tangible assets or physical 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 be
seeing the true value of the company's assets. PP&E only represents one portion
of a company's assets. Also, for companies with few fixed assets, PP&E has little
value as a metric.

Real World Example of PP&E

Below is a portion of Exxon Mobil Corporation's (XOM) quarterly balance
sheet as of September 30, 2018.

Property, plant, and equipment are physical or tangible assets that are long-term
assets that typically have a life of more than one year. Examples of property,
plant, and equipment (PP&E) include:

 Vehicles like trucks

 Office furniture
 Machinery
 Buildings
 Undeveloped land

Property, plant, and equipment assets are also called fixed assets, which are
long-term physical assets. Industries that are considered capital intensive have a
significant amount of fixed assets, such as oil companies, auto manufacturers,
and steel companies.

Analysts and potential investors will frequently review a company's PP&E to see
where and how the company is spending its money on fixed assets that could
help the company increase its profitability.
Characteristics of Property, Plant, and Equipment (PP&E)
Fixed assets have a useful life assigned to them, which means they have a set
number of years the assets will have economic value to the company. Fixed
assets also have a salvage value, which is the value remaining at the end of the
asset's life. Salvage value is also called scrap value.

Meanwhile, fixed assets undergo depreciation, which divides the cost of fixed
assets, expensing them over their useful lives. Depreciation helps a company
avoid a significant cash outlay in the year the asset is purchased.

Depreciation also helps spread the asset's cost out over a number of years
allowing the company to earn revenue from the asset.
How to Calculate Property, Plant, and Equipment (PP&E)
It's important for a company to accurately record its PP&E on its balance sheet.
Analysts and potential investors will frequently review a company's PP&E to see
where and how the company is spending its money on fixed assets that could
help the company increase its profitability.

It's also important for companies to track their PP&E in case they need to sell
assets to raise money. While most fixed assets depreciate over time and are not
easily converted to cash, some assets such as real estate can increase in value
over time, providing a company with a possible option for raising cash.

Companies use the following formula to calculate PP&E:

 Net PPE = Gross PPE + Capital Expenditures - AD

Where:

 AD = Accumulated depreciation

To determine net PP&E, add gross PP&E to capital expenditures. From this
amount, subtract accumulated depreciation.

KEY TAKEAWAYS

 Property, plant, and equipment (PP&E) are a company's physical or

tangible long-term assets that typically have a life of more than one year.
 Examples of PP&E include buildings, machinery, land, office equipment,
furniture, and vehicles.
 Companies list their net PP&E on their financial statements.
 Potential investors and analysts look at a company's PP&E to determine
the kinds of capital expenditures it's making and how it raises funding for
its projects.
How Property, Plant, and Equipment (PP&E) Impacts Investors
Companies that are expanding may decide to purchase fixed assets to invest in
the long-term future of the company. These purchases are called capital
expenditures and significantly impact the financial position of a company.
Whether a portion of available cash is used, or the asset is financed by debt or
equity, how the asset is financed has an impact on the financial viability of the
company.

It's important to know where a company is allocating its capital, whether the
company is making capital expenditures, and how the company plans to raise the
capital for their projects. If new equity is issued, the stock price might decline due
to dilution of the shares. If cash is used, the company may be unable to pay
dividends in future quarters. If the company obtains financing from a
bank or private equity firm, the company will have debt-servicing costs
associated with the additional long-term debt.

Definition of Property, Plant and Equipment

Property, plant and equipment is the long-term asset or noncurrent asset section of the balance
sheet that reports the tangible, long-lived assets that are used in the company's operations. These
assets are commonly referred to as the company's fixed assets or plant assets.
Generally, the property, plant and equipment assets are reported at their cost followed by a
deduction for the accumulated depreciation that applies to all of these assets except land (which is
not depreciated).
Examples of Property, Plant and Equipment
Typical assets that are included in property, plant and equipment are land, buildings, machinery,
equipment, vehicles, furniture, fixtures, office equipment, etc. which are used in the business. Also
included in this balance sheet classification is a subtraction of the accumulated depreciation that
pertains to these assets.