Sometimes referred to as “net property, plant and equipment” or PP&E, net fixed assets represent the cost of a company’s long-term tangible assets after allowances have been made for depreciation. Such assets are typically related to the production process and include things like factory buildings, machinery, heavy equipment, supplies and land. One common characteristic of net fixed assets is that they cannot be easily converted into cash. But they are nonetheless important in determining a company’s financial health.

Businesses typically report net fixed assets along with other assets and liabilities on a monthly, quarterly or yearly basis on their balance sheet. Before depreciation and liabilities are applied to these items they are regarded as total fixed assets. It is only after you add up the total fixed assets and subtract depreciation and liability that you arrive at the company’s net fixed assets, which represent the actual value of these assets.

How Do You Calculate Net Fixed Assets?

When calculating net fixed assets there are some important things you need to keep in mind:

• A fixed asset is something that is owned by the company and plays a role in day-to-day operations. Examples include buildings, production equipment and land.
• Fixed assets are not expected to be sold within a year.
• Depreciation takes a regular bite out of the accounting value of the asset even if the market value of the asset increases.

Formula for Calculating Net Fixed Assets

Net fixed assets = total fixed assets – depreciation and liabilities.

A slightly more involved formula for calculating net fixed assets is:

Net fixed assets = purchase price of total fixed assets + cost of any improvements – depreciation and liabilities.

Considerations

Several things should be taken into account to determine how net fixed assets affect a company’s financial position and operational performance. 

• Asset maintenance and upkeep: If you are to gain useful insight into the sustainability of a company’s net fixed assets it’s important to assess both their maintenance practices and their investment in asset upgrades. Failure to invest in proper maintenance can cause the asset to drop drastically in value.
• Asset impairment: Businesses need to regularly assess whether assets are experiencing impairment. Impairment occurs when the carrying amount of an asset is greater than its potential recoverable amount. Impairment can reduce the value of net fixed assets.
• Depreciation method: There is more than one depreciation method and in order to accurately assess a company’s financial position you must know which depreciation method is in use. Different depreciation methods can result in different levels of depreciation which can affect the reported value of the asset.
• Useful life/residual value: Changes in the estimated useful life and residual value of an asset can affect depreciation and by extension, the value of net fixed assets.
• A company’s capital expenditures: When a company has a high level of capital expenditures it may indicate growth initiatives in action. On the other hand, a decrease in capital expenditures could indicate that cost-saving measures have been put in place.

The Importance of Net Fixed Assets to Investors

Investors often want to know the value of a company’s net fixed assets to help determine if the company is worth investing in. The net fixed asset metric is also valuable to businesses contemplating mergers as it allows each business to gain a clear picture of the others’ financial practices and prospects. In a broad sense net fixed assets serve two primary purposes for investors:

1) They assign a value to the company’s assets

The value of a company’s assets plays a central role in determining the overall value of the company as well as its current financial state. Simply put, the larger the value of a company’s net fixed assets the more likely it is to attract positive attention from investors. 

2) They can expose how much the company invests in maintaining its assets

If the net fixed asset number ends up comparatively small when compared to the value of the company’s total fixed assets that typically indicates the company has not sunk much capital into maintaining their fixed assets. Investors are usually wary of a large discrepancy since it likely means it will soon be necessary to make a major investment in upgrading or even replacing the company’s fixed assets.

What Are Net Fixed Assets: Conclusion

Net fixed assets are those items, typically buildings, machinery, supplies and land etc, that play an essential role in a company’s day-to-day operations and are not likely to be sold within a year of a given date. The value of net fixed assets is arrived at by determining the value of total fixed assets and then applying depreciation and liabilities. Net fixed assets are crucial in determining the overall financial state of a company and investors rely on them to determine if a business is worth their investment. To learn more about net fixed assets, click here.