# What is Fixed Assets Ratio?

## Fixed Assets Ratio

Fixed Assets ratio is a type of solvency ratio (long-term solvency) which is found by dividing total fixed assets (net) of a company with 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;

 Liabilities Amt Assets Amt Share Capital 2,00,000 Plant & Machinery 1,90,000 Reserves & Surplus 40,000 Furniture 10,000 Short-Term Loans 25,000 Inventories 60,000 Trade Payable 25,000 Trade Receivable 30,000 Expense Payable 10,000 Short-Term Investment 10,000 Total 3,00,000 Total 3,00,000

From the above balance sheet (considering nil depreciation)

Net Fixed Assets = Plant & Machinery + Furniture

= 1,90,000 + 10,000

= 2,00,000

Long-Term funds = Share Capital + Reserves + Long-Term Loans

= 2,00,000 + 40,000

= 2,40,000

Fixed Assets Ratio = 2,00,000/2,40,000

= 0.83

This shows that for 1 currency unit of 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 from short-term funds/current liabilities.

High – Ratio of more than 1 indicates net fixed assets of the company are more than its long-term funds which demonstrates that the company has bought some of its fixed assets with the help of short-term funds. This depicts operational inefficiency.

Low – 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.