Investment analysis is an ongoing process of evaluating current and potential allocations of financial assets and choosing those allocations that best fit the investor's needs and goals. The two opposing considerations in investment analysis are growth rate and risk, which are usually directly proportionate in any given investment vehicle. This means that investments with a high degree of certainty, such as U.S.Treasury securities, offer a very modest rate of return (e.g., 5 percent annually), whereas high-risk stock investments could double or quadruple in value over a few months. Through investment analysis, investors must consider the level of risk they're able to tolerate and choose investments accordingly.
Beyond weighing the return of an individual investment, investors must also consider transaction costs, and opportunity costs that erode their net return. Transaction costs may be incurred each time an individual purchases or sells shares of stock or mutual funds. These fees are usually a percentage of the dollar amount being transferred. Such fees may sift 3-6 percent or more off the initial investment and final return. If they don't seem warranted, such expenses may be avoided by choosing no load mutual funds and dealing with discount brokers, for instance. Much more nebulous is opportunity cost, which is what the investment could have earned had it been deployed elsewhere. Opportunity cost is largely the downside of investing too conservatively given one's means and circumstances. Again, both risk and growth factor into opportunity costs. For example, low risk comes at a price of low returns, but it may be worth the lost opportunity if the investor is retired and will be depending on the invested funds for living expenses in the near future.
Fixed assets refer to physical or tangible things of value a company owns such as facilities, equipment, and land. The term "fixed assets" reflects the traditional notion that these kinds of assets are fixed and do not require much consideration after they are purchased. Contemporary accounting literature, however, now calls fixed assets "property, plant, and equipment" for the most part. Companies rely on their assets, including fixed assets, to generate profits. Modern equipment in good repair, for example, is essential for high productivity and efficiency, and hence for profits. Fixed asset analysis involves calculating the earnings potential, use, and useful life of fixed assets. In addition, fixed asset analysis determines if fixed assets are sufficiently maintained to ensure current and future earning power as well as the relative profitability contributed by fixed assets and fixed asset acquisitions.
A decrease in operational efficiency and productivity results from the improper or inadequate maintenance of malfunctioning and inefficient assets as well as from the failure to replace obsolete and irreparable assets. Asset analysis examines the age and condition of each major asset category, as well as the costs of replacing old assets to determine the output levels, downtime, and temporary discontinuances. The measure of efficiency involves the calculation of these ratio:
- Fixed asset acquisition to total assets
- Repairs and maintenance to fixed assets
- Repairs and maintenance to sales
- Sales to fixed assets
- Net income to fixed assets
To present the state of or the changes in various plant and equipment assets, accountants often prepare financial statements and schedules that plot out this information. These statements include the dispositions of company property, plant, and equipment as well as the acquisitions and divestitures of fixed assets. In preparation of these reports, accountants generally determine the age and condition of the major fixed assets and the replacement cost of them. Technology companies in particular benefit from examining this information. Accountants also compute the different ratios listed above and compare them with the industry averages to see how their companies use their fixed assets in relation to their competitors. In addition, accountants make note of assets that are no longer being used as well as those that are not productive. Companies using specialized equipment—such as those manufacturing specialized or trendy items—especially need to keep track of their fixed asset to avoid obsolescence.
Fixed asset analysis also may involve having accountants determine the hours or mileage of usage for various assets and produce reports that indicate hours of usage per month for buildings and equipment and the mileage of usage per month for vehicles. Such reports enable efficient comparison and help managers identify underused assets. Armed with this information, managers can decide whether to reallocate, sell, or otherwise use or dispose of fixed assets with low usage.
Companies benefit from fixed asset analysis by taking control of their fixed assets and maintaining their condition in order to ensure proper operation. Controlling fixed assets allows companies to avoid losses associated with misused and misplaced assets as well as with deterioration. In addition, fixed asset analysis enables companies to maximize the use of property, plant, and equipment.