Financial education is no longer just for a privileged few. We now have more access to information (remember to opt for reliable sources) that allows anyone to make money work with smart investments. Here at Hapi, like you, we learned along the way and saw the need to create and share a practical financial dictionary, so you can easily understand the basic terms every investor needs to begin their journey toward financial freedom.

Use it wisely! Today's term:

Fixed Assets: Characteristics and How to Use Them

To start with a clear idea of this concept, ask yourself: What tools does a mechanic need to work? What physical and non-physical resources does Starbucks use to deliver your coffee? These are some simple questions to help you imagine and easily identify fixed assets. Let's look at these resources:

What are their fixed assets? The most important ones (as they say) are the espresso machines exclusively designed for their brand. Additionally, furniture, utensils, etc., are clear examples of the tangible fixed assets that the company uses to provide its service. Among the non-physical assets, we can mention examples like operating licenses, trademark rights, software, among others, which represent the intangible fixed assets.

With this in mind, let's build the following definition:

Fixed assets are the goods or rights (tangible or intangible) necessary to ensure a company’s operation and continuity. They are fixed because they do not change during a fiscal year.

To add to this practical and simple concept, let's look at some of their key characteristics:

• They are not acquired for sale, at least not for more than a year of useful life. However, at the end of the period, they are expected to be converted into cash or liquidity;
• These assets suffer depreciation each year;
• This decrease represents an expense for the company, known as amortization.

Why do assets lose value?

In the end, nothing is eternal in this world except land ownership (this asset does not depreciate).

In general, most company assets lose value over time for various reasons, including obsolescence, wear and tear, or the need to stay up to date with technological advances. This process is called depreciation. It’s important to differentiate this from the term devaluation, which is related to the value of a region's currency.

In fact, there’s no doubt that the device you’re holding in your hands right now is depreciating as you read this post, because its value will be lower in five years, and you’ll need to update it. Can you imagine buying it just with the profits from a good investment? Don’t miss our weekly posts and follow us on Facebook, where we share many financial tips.

Is there a difference between depreciation and amortization?

From an economic point of view, they are not the same. Let's add another word to this financial dictionary. The main difference is:

• Talking about depreciation focuses almost exclusively on tangible fixed assets.
• On the other hand, amortization covers intangible and deferred assets.

Classification of a company's assets

Their classification may vary based on three criteria:

1. Physical or intangible: tangible assets and intangible assets;
2. Used in business operations: operational and non-operational assets;
3. Easily convertible into cash: current assets and fixed assets.

Let’s look at it simply, with examples:

First criterion

When we talk about tangible assets (also called physical assets), we refer to those that we can touch and see:

• These include physical properties (tools, furniture, and equipment);
• Intangible assets cannot be touched and are material representations, like trademark rights, registered brands, licenses, software, or even someone’s know-how. The latter refers to the knowledge of a professional or entrepreneur.

Second criterion

For the second criterion, "operational and usage," it essentially refers to whether the assets are used in daily commercial activities, where operational assets are the manufacturing equipment or tools, operational lease assets, etc.

And non-operational assets are long-term investments or assets that are not in use, like vacant land.

Third criterion

This criterion is a bit more complex and breaks the depreciation characteristic of “at least one year of useful life.” When we talk about current assets or circulating assets, we refer to goods that can be turned into cash in the short term, less than a year, or those that do not depreciate.

Some examples include accounts receivable, cash on hand, inventory, investments in stocks, or even prepaid expenses. Then, non-current assets are what we’ve already discussed—fixed assets meant to last longer than a year and tend to depreciate.

Why should I know about fixed assets?

It depends on who is interested in fixed assets. If you’re an entrepreneur looking to start a business, knowing them will allow you to clearly identify your production means, determine the investment in your fixed assets like furniture, tools, vehicles, office materials, permits, etc. All the equipment you need to generate income.

For an investor, knowing about them represents an additional advantage (along with profitability indicators). They are elements we can closely monitor to decide whether to invest in a company, evaluate financial health, its ability to generate dividends, and its overall performance.

Now, you're probably wondering how much income a company generates in relation to the total assets it owns. Find out now!

What is a company’s asset turnover ratio?

Investors, analysts, creditors, and other stakeholders often use financial analysis with the help of various indexes. In this case, we will use the asset turnover ratio to measure efficiency.

• How is it calculated?

Fixed asset turnover ratio = Sales / Fixed Assets

• How is a turnover ratio greater than 1 interpreted?

If the result is higher than 1, it means that the efficiency index is good. In other words, the company can generate sufficient income for itself and its investors.

But there is an exception: Context matters. If this metric shows a number below 1 but the industry typically has figures below 0.5, then an index lower than 1 may still be good.

If, as a business owner, you become an expert in efficiently managing your fixed assets, you’ll gain a competitive advantage. And as an investor, expanding your financial vocabulary will help you begin your journey toward prosperity. Start investing in the stock market with the right support!