What is a non-operational asset?
A non-operational asset is a category of assets that is not essential to the day-to-day operations of a business, but which can nevertheless generate income or provide a return on investment (ROI). These assets are entered in the balance sheet of a company with its operating assets, and they may or may not be broken down separately.
Understanding non-operational assets
Non-operational assets are also called redundant assets because they do not support operations and are therefore considered to be redundant and expendable if a company has to cash them. That said, companies hold non-operational assets for several reasons. For example, a business may own a piece of land valued at $ 300,000 but has no plans to build on the property for at least five years. Until its use, the land is considered a non-operational asset.
Current non-operating assets include unrestricted cash and marketable securities, loans receivable, unused equipment and vacant land. Correct identification of non-operational assets is an important step in the valuation process as they can often be overlooked by analysts and investors. In addition, an analysis based on a cash flow approach will not account for the value of non-operating assets. These assets must be valued separately and added to the operational value of the company.
Non-operational assets can be assets linked to a closed part of the business. In this case, the business can choose to keep the assets with the intention of selling or using them in the future. For example, imagine that a business has multiple retail locations and closes one of its locations. Commercial activities in this building have ceased and the company still owns the building. Since the building no longer plays a decisive role in the daily activities of the company, it is labeled as non-operational. However, the building still holds a value that could be exploited in the future, so it is also considered an asset.
Key points to remember
- Non-operational assets are assets that are not considered to be part of the main activities of an enterprise.
- Non-operational assets of a business can be unused land, spare equipment, investment securities, etc.
- Income from non-operational assets contributes to a company’s non-operational income. These assets and their income are generally omitted from the financial analysis of a company’s core business.
Use of non-operational assets to diversify risks
In other cases, non-operational assets can be used to diversify operational risks. For example, a business may own real estate or patents simply as cash investments. Although these assets are not related to the business, the company can still earn income from them. If the business loses money from its operations, these non-operational assets can provide diversification and serve as a financial safeguard.
Non-operating assets and non-operating profit
Non-operating income refers to income that an organization generates without being linked to its main activities. In some cases, non-operating income comes from non-operating assets. To continue with the example above, if the company rents its empty store, the money it collects in rent is non-operating income. Similarly, if a business has investments that are not related to its operations, the returns it generates on these investments are classified as non-operating revenue.
However, non-operating income does not always come from non-operating assets. It may also include foreign exchange gains or other forms of peripheral income such as a one-time gain on investment securities. Non-operational assets can also generate liabilities for the company that owns them. For example, a business holding unused land will be exposed to liabilities in the form of taxes due, interest owed or lawsuits generated by accidents on this property.
Non-operating assets and inventory valuation
Non-operational assets are generally treated separately from operational assets when valuing a company or its actions. The value of non-operational assets counts for the total value of the business, however, their value is excluded from financial models that estimate future growth or the profit potential of the core industries. Although non-operational assets can generate income in a business, they are not used to generate basic income.