Fixed Asset Ratio

This ratio explains whether the fixed assets are financed out of long-term funds or not; or which part of capital employed is used for purchasing the asset. It is calculated as:

It is prudent that the fixed assets and core working capital of a company is to be covered by long-term funds. If the ratio exceeds 1, it implies some of the fixed assets were financed by short-term borrowing and current liabilities. This is very dangerous since short-term borrowing indicate repayment within a short period. According to finance principle, the long-term requirements of fund should be met from the long-term fund and short-term requirements of fund should be met from the short-term fund.

From the point of view of debenture holders and other parties extending loan to the company, the ratio reveals the security available to them. When the ratio is more than 1, it implies the loans are secured by a mortgage on the fixed assets, and indicates whether additional secured loans can be raised or not.

The standard ratio is 0.67 and should not be more than 1. If it is less than 1, then it indicates that the part of the working capital is financed through long-term funds Fixed assets means net fixed asset i.e., original cost less depreciation and investment in shares of subsidiaries. Capital employed includes share capital (equity and preference), reserves and surpluses, and long-term funds.  Capital employed can be calculated based on the assets also.

         Capital Employed    =     Shareholder's funds + Long-term funds - Miscellaneous Expenditure

or

         Fixed Assets + Investments + Current Assets - Current Liabilities

Fixed Assets Ratio of Tata Steel for the years 2006-07 and 2005-06 is given below:

Company's fixed assets ratio is decreased from 0.69 to 0.43. It indicates that the company's fixed assets are more than covered by long term borrowings, which is a positive sign.

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