 What is Property, Plant & Equipment?

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.

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.

 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.

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.

If a company produces machinery (for sale), that machinery does not classify as property, plant,
and equipment. The machinery used to produce the machinery for sales is PP&E, but the
machinery manufactured for sale is classified as inventory. The same goes for real estate
companies that hold buildings and land under their assets. Their office buildings and land are
PP&E, but the houses they sell are inventory.

 Calculation of Property, Plant & Equipment

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.

As the above formula shows, Capital Expenditures (often referred to as CapEx for short) are what add to
the net property, plant, and equipment balance on the balance sheet. When the company spends
money investing in either

(1) updating existing equipment, or

(2) purchasing new additional equipment, this adds to the total PP&E balance on the balance
sheet.