Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ====== Capital Assets ====== Capital Assets are the long-term, durable tools a company uses to generate profit. Think of them as the big-ticket items with a useful life of more than one year that a business owns and uses in its operations but doesn't intend to sell as part of its day-to-day business. For a pizza shop, the oven is a capital asset; the pizzas are inventory. For a car manufacturer, the factory robots are capital assets; the cars rolling off the assembly line are inventory. These core productive [[Assets]] are recorded on a company’s [[Balance Sheet]] and are fundamental to its ability to create value over time. Unlike short-term assets that are quickly used up or sold, capital assets are the foundational workhorses of the business. Their value gradually decreases over time through a process called [[Depreciation]] (for physical assets) or [[Amortization]] (for non-physical ones), which is an important concept for investors to grasp. ===== What Are Capital Assets, Really? ===== At its heart, a capital asset is anything a company buys for the long haul to help it make money. They are the company's powerhouse, its machinery for wealth creation. Understanding them is crucial for any [[Value Investing]] practitioner because they reveal the very nature of a business. They are generally broken down into two major categories. ==== Tangible vs. Intangible ==== The simplest way to classify capital assets is by whether you can physically kick them (though we don't recommend it!). * **Tangible Assets:** These are the physical items you can see and touch. They form the backbone of many industries, especially manufacturing, transportation, and retail. Common examples include: * Land and buildings (factories, offices, stores) * Machinery and equipment (from assembly lines to computers) * Furniture and fixtures * Vehicles (trucks, company cars, airplanes) * **Intangible Assets:** These are assets that lack physical substance but can be incredibly valuable—sometimes even more so than all the tangible assets combined. They represent a company's intellectual property and market position. In the modern economy, [[Intangible Assets]] are often the source of a company's deepest competitive advantages. Examples include: * Patents (protecting inventions) * Copyrights (protecting creative works like software code or books) * Trademarks (protecting brand names and logos, like the Coca-Cola script) * [[Goodwill]] (an accounting term representing the premium paid for a company over its tangible asset value, often reflecting brand reputation or customer relationships) ===== Why Capital Assets Matter to a Value Investor ===== For a value investor, looking at a company’s capital assets isn't just an accounting exercise. It’s like being a detective, uncovering clues about the company's business model, its durability, and its true profitability. ==== A Window into a Company's Moat ==== The type and quality of a company's capital assets often define its [[Moat]], or [[Competitive Advantage]]. A railroad company like Union Pacific has a massive moat partly because of its enormous, hard-to-replicate network of tangible assets (tracks, locomotives). A tech giant like Google has a moat built on intangible assets like its search algorithm, brand name, and the vast infrastructure of its data centers. By analyzing these assets, you can ask critical questions: //How durable are these assets? How difficult would it be for a competitor to replicate them?// ==== The Power (and Peril) of Depreciation ==== Depreciation is an accounting expense that spreads the cost of a tangible asset over its useful life. For example, if a company buys a machine for $1 million that it expects to last 10 years, it might record a depreciation expense of $100,000 each year. Here’s the secret: **Depreciation is a non-cash charge.** The company isn't actually spending $100,000 in cash that year. This means depreciation reduces a company's reported [[Net Income]] (its accounting profit) but doesn't reduce the actual cash flowing into its pockets. The legendary investor [[Warren Buffett]] championed the concept of [[Owner Earnings]], which adjusts reported earnings for these kinds of non-cash items to get a clearer picture of a business's true economic performance. Understanding this difference between accounting profit and real [[Cash Flow]] is a superpower for an investor. ==== Red Flags and Green Lights ==== When you analyze a company’s financial statements, pay close attention to its capital assets and the spending related to them. * **Red Flags:** Watch out for businesses that must constantly spend huge amounts on [[Capital Expenditures (CapEx)]] just to stay competitive, without a corresponding increase in profits. This is a sign of a "capital treadmill" that can destroy shareholder value. Also, be wary of aging assets that will soon need expensive replacements. * **Green Lights:** Look for companies with highly productive assets that generate a high [[Return on Invested Capital (ROIC)]]. The best businesses are often those that can grow their earnings significantly without needing to pour lots of money back into new capital assets. These are the wonderfully efficient, cash-gushing machines that value investors dream of finding. ===== The Bottom Line ===== Capital assets are much more than just numbers on a balance sheet. They are the long-term engines of a business. By digging into what they are, how they are valued, and how efficiently they are used, an investor can gain a profound understanding of a company's inner workings and its potential to create sustainable wealth over the long run.