Property, Plant, and Equipment

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Property, Plant, and Equipment is the total value of a business' most essential assets, which cannot easily be liquidated

Property, plant & equipment (PP&E) are those assets essential to the company's business including (as the name suggests) the property on which the company does business and the equipment essential for the business' continued operations. Often, PP&E assets are tailored to be production specific and as such have little resale value. Over time, the value of these assets are generally depreciated to more accurately reflect their current worth to the company. The term "fixed assets" is often used in place of "property, plant and equipment" and the two terms are functionally equivalent.

It should be noted that while most PP&E assets (such as motor vehicles or computers) depreciate over time, land and buildings can often increase in value depending on local real-estate conditions.

Property, Plant, and Equipment are listed along with Long-Term Investments and intangible assets as non-current assets on a company's balance sheet.

Because PP&E assets are highly illiquid, investors often use the metric as a gauge of how quickly a company can adapt to dramatic shifts in the industry. In theory, companies with high PP&E relative to their total book value are less capable of adapting quickly to new and emerging trends, as they are incapable of converting assets acquired or developed for very specific purposes into cash or other, newly necessary assets.

Example

Oil and Gas Co (XYZ) decides to build oil rigs on the site of an oil-well. This costs a total of $3 million, which is added to PP&E on the balance sheet. XYZ's Petroleum Engineers determine that the useful life of the rigs is five years (about how long they think the well will continue to produce oil). Using straight-line depreciation, XYZ lists $600,000 in depreciation costs (3 million / 5) on their balance sheet each year for five years - at which point the rigs are fundamentally worthless to XYZ. It should be noted that even though the rigs represent real value to XYZ over the five years of their usefulness, because they were built for a specific purpose in a specific location and cannot easily be moved or deconstructed and rebuilt, their value is not in any way transferable or liquid. Worst case scenario, they can be sold as scrap metal, but it is highly unlikely XYZ can resell these rigs for anything close to their initial costs.

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Categories: Definitions | Topic | Mature

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 {{def}}
+{{topic}}
-Fixed assets, also known as property, plant & equipment (PP&E), are used to produce the goods or services of the company and cannot easily be converted to cash. Fixed assets include equipment such as production machinery, computers, and motor vehicles, as well as land and buildings. These assets are referred to as "fixed" since they remain unchanged in the course of production -- unlike cash, which is used to buy raw materials, which in turn is used to produce finished products. Normally, fixed assets are subject to [[depreciation]] and/or [[amortization]].
+'''Property, Plant, and Equipment is the total value of a business' most essential assets, which cannot easily be liquidated'''
-Often, fixed assets are tailored to be production specific and have little resale value. Oil rigs, for example, are built on site and are not reused after the oil well is depleted. They can be sold as scrap metal, but it is highly unlikely that a company can resell these rigs for the value of new rigs. However, companies record the value of these assets on their balance sheets at the purchase price (including the cost of installation) rather than at resale vale. Similarly, computers decrease in value quickly and can only be resold at a fraction of their original purchase price.
+Property, plant & equipment (PP&E) are those assets essential to the company's business including (as the name suggests) the property on which the company does business and the equipment essential for the business' continued operations.  Often, PP&E assets are tailored to be production specific and as such have little resale value.  Over time, the value of these assets are generally [[depreciated]] to more accurately reflect their current worth to the company.  The term "fixed assets" is often used in place of "property, plant and equipment" and the two terms are functionally equivalent.
-On the other hand, land and buildings can increase or decrease in value depending on local real-estate conditions. Fixed assets are treated as investments (instead of expenses) by companies and receive favorable tax treatment due to a [[depreciation]] allowance.
+It should be noted that while most PP&E assets (such as motor vehicles or computers) [[depreciate]] over time, land and buildings can often increase in value depending on local real-estate conditions.
+Property, Plant, and Equipment are listed along with Long-Term Investments and [[intangible assets]] as [[current assets|non-current assets]]  on a company's [[balance sheet]].
+Because PP&E assets are highly illiquid, investors often use the metric as a gauge of how quickly a company can adapt to dramatic shifts in the industry.  In theory, companies with high PP&E relative to their total [[book value]] are less capable of adapting quickly to new and emerging trends, as they are incapable of converting assets acquired or developed for very specific purposes into cash or other, newly necessary assets.
+==Example==
+*Oil and Gas Co (XYZ) decides to build [[Oil & Gas Drilling & Exploration|oil rigs]] on the site of an oil-well.  This costs a total of $3 million, which  is added to PP&E on the [[balance sheet]].  XYZ's Petroleum Engineers determine that the useful life of the rigs is five years (about how long they think the well will continue to produce oil).  Using straight-line depreciation, XYZ lists $600,000 in depreciation costs (3 million / 5) on their balance sheet each year for five years - at which point the rigs are fundamentally worthless to XYZ.  It should be noted that even though the rigs represent real value to XYZ over the five years of their usefulness, because they were built for a specific purpose in a specific location and cannot easily be moved or deconstructed and rebuilt, their value is not in any way transferable or liquid.  Worst case scenario, they can be sold as scrap metal, but it is highly unlikely XYZ can resell these rigs for anything close to their initial costs.
+[[category:mature]]