Fixed Assets Ratio
The fixed Assets ratio is a type of solvency ratio (long-term solvency) which is found by dividing the total fixed assets (net) of a company by its long-term funds. It shows the amount of fixed assets being financed by each unit of long-term funds.
It helps to determine the capacity of a company to discharge its obligations towards long-term lenders indicating its financial strength and ensuring its long-term survival.
Formula to Calculate Fixed Assets Ratio
Net fixed assets: (Total of fixed assets – Total depreciation till date) + Trade Investments including shares in subsidiaries.
Long-term funds: Share capital + Reserves + Long-term loans.
Explanation with an Example
From the balance sheet of Unreal corporation calculate its fixed assets ratio;
|Share Capital||2,00,000||Plant & Machinery||1,90,000|
|Reserves & Surplus||40,000||Furniture||10,000|
|Trade Payable||25,000||Trade Receivable||30,000|
|Expense Payable||10,000||Short-Term Investment||10,000|
From the above balance sheet (considering nil depreciation)
Net Fixed Assets = Plant & Machinery + Furniture
= 1,90,000 + 10,000
Long-Term funds = Share Capital + Reserves + Long-Term Loans
= 2,00,000 + 40,000
Fixed Assets Ratio = 2,00,000/2,40,000
This shows that for 1 currency unit of the long-term fund, the company has 0.83 corresponding units of fixed assets; furthermore, the ideal ratio is said to be around 0.67.
High and Low Fixed Assets Ratio
Ideally, fixed assets should be sourced from long-term funds & current assets should be from short-term funds/current liabilities.
High – A ratio of more than 1 indicates net fixed assets of the company are more than its long-term funds which demonstrate that the company has bought some of its fixed assets with the help of short-term funds. This depicts operational inefficiency.
Low – A ratio of less than 1 indicates long-term funds of the company are more than its net fixed assets It is desirable to some extent as it means that a company has sufficient long-term funds to cover its fixed assets.
Short Quiz for Self-Evaluation
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>Related Long Quiz for Practice Quiz 35 – Fixed Assets