Hard Assets

Types of assets that are tangible, which means assets that are real, not imaginary, and can be seen and touched.

Hard assets are the types of assets that are tangible, which means assets that are real, not imaginary, and can be seen and touched.

It includes all those physical assets which constitute some intrinsic value.

These are generally fixed assets held by the business for a more extended period, i.e., more than 12 months.

Individuals, institutions, and corporate bodies hold these tangible assets primarily for two reasons.

  •  It helps to increase the production of goods and services.
  •  It also helps in generating and growing the revenue of a company.

Investment in physical assets can protect individuals from inflation and provide a steady income source.

It provides the benefits of diversification due to its low correlation with soft assets.

It also provides security in times of uncertainty, market instability, economic fluctuations, and volatility. 

The value of some assets like real estate and land increases with time. Thus, it leads to capital appreciation.

They are considered a safe investment compared to soft assets because they have some value even at the time of crisis or fall in the commodity's market price.

However, they are more difficult to liquidate than other asset classes. 

Examples

  •  Land 
  •  Real estate
  •  Furniture 
  •  Buildings
  •  Vehicles
  • Equipment

And all other assets are used for operating the day-to-day activities of a business.

Characteristics 

  • They are perishable
  •  They can be held for a long and shorter time frame.
  •  They are tangible assets.
  •  They possess intrinsic value.
  •  They can be used as a hedge against inflation.

Advantages and disadvantages

The advantages and disadvantages are:

Advantages 

1. It can be used as collateral.

2. People investing in physical assets can utilize tax benefits and deductions on paying property tax, interest, depreciation, and insurance.

3. It is a stable and safer source of investment.

4. Unlike equities and futures markets, the forces of demand and supply determine prices. Pricing and Valuation of tangible assets are under our control. We need not depend upon any other external factor.

5. It is comparatively less risky. 

6. Debt financing is also available for purchasing physical assets.

7. Tangible assets are easier to understand than soft assets like bonds and equity as the price of a company's stock is anticipated by considering several factors in mind like company financials, macroeconomic factors, industry type, interest rate, etc.

Limitations 

1. Not all assets increase with time. There are some assets like machinery whose value depreciates with time.

2. Hard assets are challenging to liquidate, which means they cannot be sold quickly if a person has to raise cash.

3. A rise in interest rate increases the interest on borrowed funds and decreases the value of tangible assets.

4. Huge funds are required for investing in physical assets; if the company cannot service the debt, it can go into financial issues.

5. It isn't easy to generate short-term profits.

6. Maintenance charges are also comparatively higher.

7. However, these can be managed with proper strategy and research of associated risk and reward. 

Companies and hard assets 

Why are hard assets included in a company's intrinsic value? 

Hard assets constitute a significant portion of the company's assets. These assets are generally used for producing or purchasing goods and services.

During financial issues and hardships, companies sell some of their assets to pay shareholders, debenture holders, and creditors of that company.

For these reasons, analysts include some portion of the company's assets value in estimating the intrinsic value of a company. 

Usually, while calculating the intrinsic value, certain things are taken into consideration:

  1. Cash flow 
  2. Revenue growth
  3. Taxes
  4. Estimated future returns and revenues

How do companies pay for a hard asset?

A company purchases these assets for a longer time and generally involves significant funds. These types of investment decisions are often called long-term funding decisions.

As it involves a large amount of capital, companies usually:

1. Take a loan from a bank, private financial intuitions, or the government.

2. Issue debenture, corporate bonds, and shares.

3. Sometimes, they also sell the shares of a company. 

4. Take funds from venture capital.

To pay the amount incurred on purchasing these tangible assets.

Investments in hard assets

Investing in tangible assets is generally preferred by most investors due to the following reasons:

Investment

1. It helps in the diversification of the investment portfolio.

2. It gives decent returns that outperform most of the asset classes.

3. They are less volatile in comparison with assets like stocks. Hence they can be considered a safer investment option.

4. Investors can benefit from investing in physical assets as they can get a fixed income in the form of rents and capital appreciation, as the value of some assets like real estate increases over time.

5. Possibility of improving the risk/reward ratio by including hard assets investment portfolio.

6. They offer many benefits that other asset classes lack. 

7. Safe and stable investment option.

8. They can be used as a hedge against inflation.

Hard assets v/s soft assets: what's the difference?

Soft assets are generally intangible assets that cannot be physically seen or touched.

Technological companies have more soft assets like patents and trademarks because their core activities include research and development.

In contrast, manufacturing companies have comparatively more tangible assets because they want more machinery, space, land, and building for producing goods and services.

Some examples of intangible assets are:

  • Trademark
  • Patents
  • Copyright
  • Franchise
  • Goodwill
  • Company's brand 
  • Company's reputation
  • Investment in securities like equity, bonds
  • Invention 

Though it takes some time to liquidate tangible assets, intangible assets, on the other hand, cannot be liquidated.

The company itself creates intangible assets through its research and invention. Still, the case is quite the opposite regarding physical assets, as the company has to incur a considerable amount of capital for purchasing them.

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Researched and Authored by Tanishq | LinkedIn 

Reviewed and Edited by Aditya Salunke | LinkedIn

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