Fundamentally, there are two types of assets that businesses possess: tangible and intangible assets. Tangible assets typically relate to physical possessions or property owned by a company – such as computer equipment, vehicles or office spaces. Tangible assets are typically recognised as the main form of asset that companies use to operate.
On the other hand, intangible assets don’t tend to exist in a physical form, but represent perceivable value all the same. One classic interpretation of an intangible asset can be the copyright to a song released by a record company. Said company owns the use of the song and would be due a royalty each time that it’s played.
All business assets can be considered tangible or intangible, some of which could take the form of short-term or long-term assets. Let’s take a deeper look at how each type of asset works and how business owners can invest in both tangible and intangible assets accordingly:
Understanding the differences between tangible and intangible assets
Tangible assets are vital to many companies as they typically provide the means in which to produce products and services and operate. As they are physical entities, tangible assets can become damaged over time and worn.
Whereas intangible assets can be perceived as adding to a company’s current or future value and can oftentimes be more valuable to a business than its tangible assets. Both types of assets can be recorded on a balance sheet, which can aid investors and creditors in assessing the true worth of a company.
Tangible assets are considerably easier to value due to the fact that they often have a clearly defined cost and expected life-span. Tangible assets are recorded on a company’s balance sheet initially but as they are used up they can be carried over to an income statement.
For instance, inventory can be classed as a usable tangible asset and will be recorded in the cost of goods sold for a company. The cost of goods sold relates to the costs involved in the production of products.
Another type of tangible asset can be found in the form of fixed assets like working space and reusable equipment. These assets will also be recorded on a balance sheet but are also subject to depreciation. This is the process of allocating a portion of the cost of an asset over time as it is utilised in order to generate profits for a business. Acknowledging depreciation in tangible assets is important because it reflects the natural aging of equipment.
While tangible assets carry a fixed value that’s liable to depreciate over time, intangible assets are altogether much harder to value from an accounting perspective. Some intangible assets may carry an initial purchase price – such as the case with patents or licences. All intangible assets should be recorded on a company balance sheet as long-term assets.
The costs associated with some intangible assets can be spread over a period of months or years based on the way in which said asset adds value to the company. While depreciation is used to continually value tangible assets, intangible assets use amortization. Amortization bears similarities to depreciation, but is only applicable to intangible assets. Essentially, amortization spreads out the cost of intangible assets each year as it is expensed on income statements.
Tangible asset investments
Tangible assets can make for great alternative investments for businesses and individual investors alike. These take the form of investing in physical goods like gold, real estate, antiques and other collectibles that are expected to gain value over time.
Such assets can operate away from the influence of global stock and bond markets, meaning that investors can lower their exposure to the risky nature of finance in the 2020s.
In an investment sense, tangible asset investing could pay dividends during bear markets. Businesses could look to consolidate market value by buying office spaces in prime locations, or investing in reusable assets.
The beauty of tangible assets is that they’re somewhat protected from inflated markets. This is particularly true of bullion coins and bars. Over the past century, according to the Federal Reserve, the purchasing power of the dollar fell almost 29% while the inflation-adjusted value of gold increased by over 300% during the same period.
The long-term value of gold has been assured over a timeframe of thousands of years, and the precious metal stands as an example of how many tangible assets will always carry economic value as opposed to many intangible assets which could fade into irrelevance and lose their worth.
There’s also a psychological benefit to many tangible investments. If an investor buys a collectible, or piece of art, it carries a considerable amount of potential while making the individual or company enjoy holding it in their possession.
Tangible assets have the power to hold their value in many cases while also serving as a useful function for individuals and families or employees.
The potential for personal satisfaction among investors can’t be underestimated, and is less likely to be achieved for holders of intangible assets.
Intangible asset investments
Assets like corporate culture, diversity, talent and brand reputation are trickier to value for companies, but can ultimately be just as integral to their success.
Investment in intangibles can be difficult, and may prove tricky for financial officers to thus recommend to the board if the return on the investment isn’t easily quantifiable. However, the longer-term investment case can be quite compelling as soon as you cast your mind towards the hidden values of intangibles.
Visualising intangible growth
It’s fair to say that intangible assets played a significantly smaller role than they do today, with many companies still to realise this fact. In recent years, an higher levels of competition and a more digitised economy has led to more businesses focussing on things like intellectual property as companies look to gain ground on each other in more unconventional ways.
Raconteur has highlighted the significance of this shift in emphasis within analysis produced by Aon and the Ponemon Institute, which looked to cast a light on how tangible and intangible assets have been valued over the previous 43 years:
(Image: Visual Capitalist)
In recent years, intangible assets have compounded their value from acting as more of a supporting asset into becoming a major player in the valuation of companies. Aon and Ponemon’s findings show that intangibles account for as much as 84% of all enterprise value on the S&P 500 today – a seismic rise from only 17% back in the mid 70s.
Understanding the power of intangible investing
The significance of intangible investing is unignorable among investors. Companies that possess more intangible assets carry extra investment value and hold significantly more potential for future growth.
While directly investing in intangible assets can be tricky for investors, it’s certainly useful to seek out organisations that appear to possess better intangibles than their competitors in the way of copyrights, patents or industry knowledge. Investing in organisations with better goodwill or customer perceptions can be particularly effective too.
In a financial climate that’s becoming increasingly uncertain, and with the prospect of depreciation facing many tangible assets, it’s worth looking into the hidden value of stocks and their associated companies. Intangible investing can result in a healthy portfolio moving forward.