Business means increasing your wealth. This can be done through smartly applying for tax deductions. This can be done through depreciation. Long term assets such as PPE depreciate and hence these come under expense after a period of time. Therefore the taxable income reduces and so does the tax you have to pay.
In any business the asset structure plays a pivotal role in the success of the business. Their asset structure is usually made up of Current assets, PPE, Investments, Non tangible Assets. Business follows the Asset Life Cycle management. Fixed assets usually undergo depreciation which lowers net income and these results in tax savings for the company.
Business use the ROA (Return on Assets) to identify how profitable a company is relative to its assets. ROA is shown as percentages. ROA takes into account a company’s debt. The simple formula for ROA is
ROA= Net Income÷Total Assets
The ROA figure gives investors an idea of how effective the company is in converting the money it invests into net income. The higher the ROA number, the better, because the company is earning more money on less investment.
Several companies such as in transportation, machinery have a higher percentage of PPE while software, data companies have a much lower share of PPE. Some companies reduce asset base to improve ROA by leasing fixed assets. Moving from in house manufacturing to outsourcing reduces ROA.
Therefore the Long term assets play a pivotal role in the working of any company. A wrong asset can change the ROA ratio and put the company into trouble.
At the same time depreciation can help save tax. So several things go on simultaneously in a company where there are fixed assets. Regular maintenance, renovation sometimes even selling off assets is required. Companies also invest in non tangible assets so that in the near future if they are ever cash strapped, they can always bank on these assets.