MSG Team's other articles

9367 Floatation Costs and Investment Banking

Whenever companies need to raise money by accessing the public markets, they have to use the services of investment banks. This is because investment bankers have a readymade network which they use to sell securities to the general public. Investment banks are the central character for a company if it needs to go public. It […]

10490 The Objectives of Reorganization

After a firm has filed for bankruptcy, the court provides relief against creditors and even further lawsuits. However, this is a temporary situation. According to the court, the next step for the business is to re-organize itself. Now, reorganization is a broad term that could mean different things to different people. There have been bankruptcy […]

13021 Customer Footfall Analysis

The retail sector has started using data and analytics in a big way. In general, data and analytics is used extensively by online players in the retail sector. This means that companies like Amazon and eBay have traditionally been collecting data extensively from their customers and have also been using this data to make business […]

12394 Availability Bias in Behavioural Investing

All of us have seen movies or have read novels wherein there are several witnesses who are describing the same crime scene. However, each of them describes the scene in different ways. This is because their experiences are colored with their own thought processes. This makes different people look at the same situation in different […]

10505 Open Banking – Meaning, Need, Advantages and Disadvantages

The field of commercial banking is undergoing many technological changes simultaneously. Open banking is one such technological change. Open banking is unique in the sense that this change has been initiated by regulators in most parts of the world. Generally, technological changes are adopted by commercial banks themselves with a view to increasing their productivity […]

Search with tags

  • No tags available.

Formula

Equity to Fixed Assets Ratio = Equity / Total Fixed Assets

  • Equity includes the retained earnings
  • Total Fixed assets excludes intangible assets of the firm

Meaning

The “equity to fixed assets” ratio shows analysts the relative exposure of shareholders and debt holders to the fixed assets of the firm. Thus, if the “equity to fixed assets” ratio is 0.9, this means that shareholders have financed 90% of the fixed assets of the company. The remaining 10% as well as current assets and investments have all been financed by debt holders.

Assumptions

There is an implicit assumption that the number of shares outstanding has remained unchanged. This is because the ratio measures the total amount of equity. The total amount of equity can be increased by issuing shares at lower prices to the public or to the promoters. However, this may not be a desirable scenario since more shares means a loss to individual shareholders.

Interpretation

The “equity to fixed assets” ratio is used by a variety of stakeholders for different purposes. The common interpretations that are drawn based on this ratio have been listed below:

  • Creditworthiness: Bankers and other lenders use the “equity to fixed assets” ratio widely. They use it to understand how much of the fixed assets of the firm are already financed by debt. A firm with a low “equity to fixed assets” ratio has not utilized its credit to the maximum and therefore extension of credit is relatively secure. This is because in the event of a liquidation, the creditors have the first claim over the proceeds recovered from the assets.

  • Conservative vs. Aggressive: What might be good news for the bankers may not be such great news for the equity shareholders. This is because if the firm has a very low “fixed assets to equity” ratio, it means that the firm is underutilizing its credit. This means that the shareholders could have achieved a higher rate of return in case the company managed its operations better and used credit to its advantage. Hence a high “equity to fixed assets” ratio is not a very good sign either.

  • Less than 0.65 Not Recommended: Based on empirical evidence, certain analysts have concluded that companies that have a “equity to fixed assets” ratio of less than 0.65 are very risky bets. Companies where shareholders own less than 65% of the fixed assets are likely to cash strapped and debt ridden. These companies usually run into solvency and liquidity issues and therefore must be avoided.

Article Written by

MSG Team

An insightful writer passionate about sharing expertise, trends, and tips, dedicated to inspiring and informing readers through engaging and thoughtful content.

Leave a reply

Your email address will not be published. Required fields are marked *

Related Articles

What are Common Size Statements ?

MSG Team

Cash Ratio – Meaning, Formula and Assumptions

MSG Team