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Property, Plant and Equipment

Investing Lesson 3 - Analyzing a Balance Sheet


Property, Plant and Equipment

Property, Plant and Equipment represents money a company has invested in factories, computers, and other fixed assets. Some companies are more asset intensive than others, resulting in a higher percentage of PP&E on the balance sheet.

These are referred to as "fixed assets". In other words, these are the corporation's real estate, buildings, office furniture, telephones, cafeteria trays, brooms, factories, etc. They are the physical assets the company owns but can't quickly convert to cash.

Depending on the type of business, these may or may not make up a large percentage of the total assets. Most of the assets of a railroad or airline will fall into this category (these companies must continue to buy railroad cars and planes to survive - both of which are fixed assets). An advertising agency on the other hand, will have far fewer fixed assets. They require nothing but their employees, some pencils, and a few computers.

You must be careful not to pay too much attention to this number. Since companies are often unable to sell their fixed assets within any reasonable amount of time (who would be willing to buy three notebook binders, a factory, the broom in the broom closet, etc. at a moment's notice?) they are carried on the balance sheet at cost regardless of their actual value. It is possible for companies to grossly inflate this number (which is called "watering" the stock), or to write the values down to nothing (some companies have $1 million dollar buildings carried for $1 on the balance sheet).

When analyzing a balance sheet, you will want to look at this number with a raised eyebrow. Don't completely ignore it (that would be foolish), but certainly don't take it too seriously.

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This page is part of Investing Lesson 3 - Understanding the Balance Sheet. To go back to the beginning, see the Table of Contents. If you have already read this lesson, you can skip directly to the Balance Sheet Quiz.

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