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

Fixed Assets Ratio Formula

 

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.

 

>Read What is Interest Coverage Ratio?



 

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