Hard AssetsDefined with Examples & More

Lisa Borga

Hard assets refer to a tangible physical asset that possesses intrinsic value.

These assets are often purchased for their ability to increase a company’s revenue or production capacity.

Hard assets may also be purchased by companies or individual investors as a form of investment in order to hedge against a loss or depreciation in the value of soft assets.

Common examples of hard assets include vehicles, land, machinery, furnishings, and precious metals.

hard assets

Hard Assets Explained

Hard assets are tangible or physical assets that hold intrinsic value.

Generally, these assets are held for the long term, and because of their intrinsic value, they may be held for investment as well as to offer benefits to the production process.

Hard assets most commonly are used in reference to fixed assets which are long-term hard assets intended to benefit a company’s production of goods or services.

A fixed asset is expected to offer benefits for a period of greater than one year.

Common examples of hard assets include buildings, production machinery, and vehicles.

Long Term Hard Assets Vs. Short Term

Though hard assets are most commonly long-term assets, they may still be short-term or current assets, which indicates that they will be consumed within one year.

This commonly includes a company’s inventory of raw materials or finished goods, which will generally be consumed or sold quickly.

This could also include a company’s reserves of cash in addition to any hard asset, which could be converted into cash in a single year or accounting period.

In contrast, the long-term hard assets are expected to offer benefits for a period longer than a single year.

Most commonly, these are fixed assets which are known as such because they retain their value and benefits for a significant period of time.

Depending on the particular type of fixed asset, its value may gain value or appreciate with time, such as real estate, which will generally increase in value over time.

However, fixed assets such as machinery will typically decrease in value, albeit often slowly over time.

Though long-term and short-term hard assets are both assets that offer benefits to a company, the major difference between the two is the timeframe in which they will offer benefits.

Short-term assets can be converted into cash quickly, meaning that they can offer near-immediate financial benefits such as finished product inventory, which can likely be sold within a short period of time.

In contrast, the long-term hard assets may not offer any short-term financial benefits.

An example of this would be machinery which can be used in the production process.

Though it may help to produce a company’s products, on its own, it is incapable of providing short-term financial returns.

Despite this, both production machinery and raw materials are both regarded as hard assets.

Hard Assets Vs. Soft Assets

In contrast to hard assets, which are tangible or physical assets, soft assets are intangible or non-physical things that possess value.

These include things such as copyrights, patents, goodwill, proprietary knowledge, and investments in securities, among many others.

The value of soft assets is prone to frequent fluctuations, in contrast to hard assets, which generally have a relatively stable value over a period of time.

This is in part because there is a finite supply of hard assets, which gives them a fundamental value regardless of fluctuations in the economy.

Due to this low correlation with conventional investment instruments, hard assets can act as a valuable tool to diversify an individual or organizational investor’s investment portfolio.

For accounting purposes, hard assets are generally listed on a balance sheet as property, plant, or equipment.

For soft assets, more often than not, companies are incapable of liquidating these intangible assets, so they will often not be listed on a balance sheet.

Despite this, they can provide a company with a significant amount of value and future benefits.

Though hard and soft assets have significant differences, they are both generally held for a long period of time.

The balance between the number of hard assets held by a company to soft assets varies considerably by industry.

For example, a software development company will often hold a large number of copyrights and patents and often relatively few hard assets.

In contrast, an automotive manufacturing company will often hold a large number of hard assets, including production machinery and an inventory of finished vehicles awaiting sale.

How Do Companies Finance Hard Asset Purchases

hard assets

Though a company may not need to make any special preparations to purchase short-term hard assets such as raw materials, hard assets, which are fixed assets, often require a significant capital investment to purchase.

As a result, a company’s management will typically have to make a long-term funding decision which may require external sources of finance.

This could include:

  • A new issue of stock
  • Acquiring a bank loan
  • Issuance of bonds
  • Acquiring venture capital funding

Hard Assets are often some of a company’s most valuable assets because they are often used in the production of other assets or as a way to purchase services or goods.

Additionally, should it be necessary, a company could sell its hard assets in order to obtain needed cash.

This is why analysts will include hard assets when calculating the intrinsic value of a company.

A company’s intrinsic value can be computed using one of the various models available.

This calculation typically includes an analysis of the company’s cost structure, assets, future revenue streams, and cash flow.

Hard assets are part of the valuation of a company due to the fact that they can be sold if necessary to obtain the cash needed to meet the company’s debts or pay shareholders or bondholders if the company is having financial difficulties or being liquidated.

Advantages & Disadvantages of Hard Assets

Advantages of Hard Assets

  • Hard assets are often used to produce other goods or services.
  • Hard assets retain their value better in a bear market. Their value may decline, but generally, the value will not drop by a large amount very quickly as with some other assets.
  • Hard assets are sometimes preferred by investors because it is easier to understand their value when compared to some other investments such as equities.
  • Hard assets are a good way to add diversity to a portfolio since they are quite different than conventional investments, such as bonds or stocks.
  • Hard asset investments do not require as much attention as many other investments because they are not as likely to be affected by financial news.
  • Hard assets are a good hedge against inflation because their value tends to rise along with inflation.

Disadvantages of Hard Assets

  • Hard assets do not provide a regular income the way soft assets, such as bonds, do.
  • Hard assets can be more difficult to sell than soft assets, such as stocks which can generally be sold very quickly.
  • The long-term returns on hard assets do not tend to be as good as the returns on soft assets.
  • Hard assets generally require more maintenance than soft assets.
  • Hard assets often have higher transaction costs than soft assets. This means it may take longer to earn a profit on these assets.

Hard Asset Example

Deere and Company is a corporation that manufactures farm, construction, forestry, and lawn care equipment, along with some items used in heavy equipment.

The machinery the company uses to manufacture the items they sell is considered to be hard assets.

The raw materials used in the production process are also hard assets.

Any patents or trademarks the company owns are soft assets.

The hard assets are valuable because they are part of the production process.

However, they are also valuable because, if necessary, they could be sold for cash to pay off the company’s debts.

Final Thoughts

Investors and companies should have hard and soft assets because they are both important.

They have advantages and disadvantages that need to be considered before making an investment.

It is best to have a strategy to follow before making these investments and then follow it.

However, hard assets are always essential for a company because they are necessary for production in addition to being a way to obtain cash in times of financial distress.

Key Takeaways

  • Hard assets are tangible or physical assets that an individual or company owns.
  • Hard assets stand in direct contrast to soft assets, which are intangible or non-physical assets.
  • The value of hard assets will generally move in the opposite direction from soft assets allowing them to act as a hedge against losses.

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  1. Harvard "Financial Contractibility and Asset Hardness" White paper. August 11, 2022

  2. London Business School "Why is it so hard to value cash-rich companies?" Page 1 . August 11, 2022