Definition
The accumulated depreciation to fixed assets ratio allows analysts to understand if new assets are being deployed by the company. An increase to the company's accumulated depreciation to fixed assets ratio can indicate management is struggling to find the cash necessary to make new investments.
Calculation
Accumulated Depreciation to Fixed Assets Ratio = Accumulated Depreciation / Fixed Assets
Explanation
The accumulated depreciation to fixed assets ratio allows the investor-analyst to understand if a company is generating enough cash to replace aging equipment. Low ratios are desirable, while an increase to this ratio over time can be indicative of a problem. Other reasons the ratio may grow over time include:
The company's fixed assets have relatively long lives. For example, infrastructure investments (buried natural gas pipelines, water treatment plants, transmission towers) may be in service for decades before needing replacement.
The company takes an aggressive approach to depreciation, expensing asset costs over the shortest timeframes possible, resulting in a rapid rise in accumulated depreciation relative to the age of the assets.
The investor-analyst should track this metric over time to see if a pattern of low investment continues. It's also important to assess the company's value versus a benchmark, since ratios may be indicative of the durability of the assets within an industry.
If the ratio increases over time and is high relative to its peers, the company may have trouble generating enough cash to purchase new equipment. If true, the company's maintenance expense to fixed assets ratio should be analyzed to see if it's declining over time.
Fixed assets, including property, plant and equipment is typically included in a company's Form 10-K along with accumulated depreciation.
Example
The information appearing in the table below was extracted from Company A's Form 10-K. The year-over-year change to fixed assets as well as accumulated depreciation was calculated by the investor-analyst.
The information above reveals Company A's pattern of relatively low new capital investments relative to depreciation expense. The investor-analyst confirmed the values in Year 4 and 5 were high relative to an industry benchmark. The company's cash flow statement also confirmed the company is not generating enough money to purchase new equipment.
Related Terms
sales to administrative expense ratio, sales backlog ratio, sales to employee, sales to fixed assets, sales to working capital, maintenance to fixed assets ratio, accumulated depreciation to fixed assets ratio
Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | |
Accumulated Depreciation | $3,834,000 | $5,735,620 | $8,203,220 | $11,225,340 | $14,773,550 |
Fixed Assets | $25,560,000 | $26,071,000 | $26,462,000 | $26,727,000 | $26,861,000 |
Accumulated Depr. to Fixed Assets | 15.0% | 22.0% | 31.0% | 42.0% | 55.0% |
The information above reveals Company A's pattern of relatively low new capital investments relative to depreciation expense. The investor-analyst confirmed the values in Year 4 and 5 were high relative to an industry benchmark. The company's cash flow statement also confirmed the company is not generating enough money to purchase new equipment.
Related Terms
- The sales backlog ratio is an asset utilization metric that allows analysts to understand if a company is able to maintain its current level of production. Sales backlog is typically used by company management to track performance, since companies normally do not release their backlog of orders to the public.
Moneyzine EditorSeptember 21st, 2023 - The sales per employee ratio is an asset utilization metric that allows analysts to understand how efficiently a company uses its staff to generate revenues. Sales per employee is a popular industry measure; oftentimes used by both the investor-analyst and company management to benchmark performance.Moneyzine EditorSeptember 21st, 2023
- The sales to fixed asset ratio is an asset utilization measure that allows analysts to understand if a company requires a large investment in property, plant, and equipment in order to generate revenues. Some industries are capital intensive, requiring significant assets to generate sales.Moneyzine EditorSeptember 21st, 2023
- The term sales to working capital ratio refers to a calculation that allows an investor-analyst to understand if a company is facing a liquidity problem. Since the metric can vary by industry, this ratio is best used as a benchmark and / or tracked over time.Moneyzine EditorSeptember 21st, 2023
The maintenance expense to fixed assets ratio allows analysts to understand the age or condition of the company's equipment. An increase to a company's repairs and maintenance expense to fixed assets ratio over time can signal aging equipment or assets that are being pushed to their operating limits.Moneyzine EditorJanuary 24th, 2024
The capital to labor ratio allows analysts to understand if costs are being reduced by purchasing assets to automate labor-intensive tasks. An increase to a company's capital to labor ratio over time can signal an attempt to remain competitive, or improve margins, through automation.Moneyzine EditorJanuary 10th, 2024
The fringe benefits to salaries expense ratio allows analysts to understand how much a company spends on employee benefits relative to an industry benchmark. A company can analyze its competitive position by benchmarking the cost of its benefits programs relative to the industry or peers. The metric is also useful when analyzing potential savings opportunities during a merger.Moneyzine EditorJanuary 18th, 2024- The sales expense to sales ratio allows analysts to understand how efficient a particular sales channel is at generating revenues. Calculating its sales expense to sales ratio allows a company to direct resources to the most effective channels. Companies can also track this metric over time, looking for movements that might indicate a change in consumer purchasing behavior.Moneyzine EditorSeptember 21st, 2023
- The discretionary cost to sales ratio allows analysts to quantify the unrestricted expenses that can be eliminated in the near term. When faced with an economic or industry downturn, companies can bolster profits by eliminating what are deemed optional expenses. Calculating their discretionary cost to sales ratio allows companies to understand the magnitude of this opportunity.Moneyzine EditorSeptember 19th, 2023
