Feb 25, 2023
Current Assets to Fixed Assets
What is Current Assets to Fixed Assets
Current Assets to Fixed Assets is a financial metric that measures how much a company's liquid and short-term assets cover its fixed assets. The metric is calculated by dividing current assets by fixed assets. This ratio is a good way to measure a company's liquidity and ability to pay off its short-term debts.
Why Current Assets to Fixed Assets is Important
The Current Assets to Fixed Assets ratio is an important metric for businesses because it provides insight into the company's liquidity and ability to pay off its short-term debts. This metric measures how easily the company can liquidate its assets in order to cover its liabilities. A high ratio indicates that the company has a strong liquidity position, while a low ratio could be an indication of solvency issues.
How Current Assets to Fixed Assets is Calculated
The Current Assets to Fixed Assets ratio is calculated by dividing current assets by fixed assets. Current assets include cash, investments, marketable securities, accounts receivable, and inventory. Fixed assets include property, plant, and equipment (PPE). The formula looks like this:
Current Assets to Fixed Assets = Current Assets / Fixed Assets
Example:
Let’s say a software company has $20 million in current assets and $10 million in fixed assets. The Current Assets to Fixed Assets ratio would be 2:1, or 2.0.
How to Improve Current Assets to Fixed Assets
The Current Assets to Fixed Assets ratio can be improved by increasing current assets or reducing fixed assets. Increasing current assets can be done by investing in short-term securities, managing accounts receivable more efficiently, or increasing inventory. Reducing fixed assets can be done by selling off unneeded PPE or leasing equipment instead of buying it.
Why Investors Value High Current Assets to Fixed Assets
Investors value a high Current Assets to Fixed Assets ratio because it suggests that the company has a strong liquidity position and is able to pay off its short-term debts. This can be attractive to potential investors because it reduces the risk of investing in the company.
How Current Assets to Fixed Assets Relates to Other Financial Metrics
The Current Assets to Fixed Assets ratio is related to other financial metrics such as the Quick Ratio and the Current Ratio. The Quick Ratio measures a company’s ability to pay off its short-term liabilities with its most liquid assets (cash and marketable securities). The Current Ratio measures a company’s ability to pay off its short-term liabilities with its current assets.
Sources:
Investopedia. (2020). Current Assets to Fixed Assets Ratio. Retrieved from https://www.investopedia.com/terms/c/current_assets_to_fixed_assets_ratio.asp
Investopedia. (2020). Quick Ratio. Retrieved from https://www.investopedia.com/terms/q/quickratio.asp?lgl=rira-baseline-vertical
Investopedia. (2020). Current Ratio. Retrieved from https://www.investopedia.com/terms/c/currentratio.asp?lgl=rira-baseline-vertical
Current Assets to Fixed Assets
What is Current Assets to Fixed Assets
Current Assets to Fixed Assets is a financial metric that measures how much a company's liquid and short-term assets cover its fixed assets. The metric is calculated by dividing current assets by fixed assets. This ratio is a good way to measure a company's liquidity and ability to pay off its short-term debts.
Why Current Assets to Fixed Assets is Important
The Current Assets to Fixed Assets ratio is an important metric for businesses because it provides insight into the company's liquidity and ability to pay off its short-term debts. This metric measures how easily the company can liquidate its assets in order to cover its liabilities. A high ratio indicates that the company has a strong liquidity position, while a low ratio could be an indication of solvency issues.
How Current Assets to Fixed Assets is Calculated
The Current Assets to Fixed Assets ratio is calculated by dividing current assets by fixed assets. Current assets include cash, investments, marketable securities, accounts receivable, and inventory. Fixed assets include property, plant, and equipment (PPE). The formula looks like this:
Current Assets to Fixed Assets = Current Assets / Fixed Assets
Example:
Let’s say a software company has $20 million in current assets and $10 million in fixed assets. The Current Assets to Fixed Assets ratio would be 2:1, or 2.0.
How to Improve Current Assets to Fixed Assets
The Current Assets to Fixed Assets ratio can be improved by increasing current assets or reducing fixed assets. Increasing current assets can be done by investing in short-term securities, managing accounts receivable more efficiently, or increasing inventory. Reducing fixed assets can be done by selling off unneeded PPE or leasing equipment instead of buying it.
Why Investors Value High Current Assets to Fixed Assets
Investors value a high Current Assets to Fixed Assets ratio because it suggests that the company has a strong liquidity position and is able to pay off its short-term debts. This can be attractive to potential investors because it reduces the risk of investing in the company.
How Current Assets to Fixed Assets Relates to Other Financial Metrics
The Current Assets to Fixed Assets ratio is related to other financial metrics such as the Quick Ratio and the Current Ratio. The Quick Ratio measures a company’s ability to pay off its short-term liabilities with its most liquid assets (cash and marketable securities). The Current Ratio measures a company’s ability to pay off its short-term liabilities with its current assets.
Sources:
Investopedia. (2020). Current Assets to Fixed Assets Ratio. Retrieved from https://www.investopedia.com/terms/c/current_assets_to_fixed_assets_ratio.asp
Investopedia. (2020). Quick Ratio. Retrieved from https://www.investopedia.com/terms/q/quickratio.asp?lgl=rira-baseline-vertical
Investopedia. (2020). Current Ratio. Retrieved from https://www.investopedia.com/terms/c/currentratio.asp?lgl=rira-baseline-vertical