How to Interpret Assets to Net Worth Ratios
Original post by Sean Mullin of Demand Media
Net worth is the sum of all assets minus the sum of all liabilities. Fixed assets are assets that an individual or company cannot easily transform into cash. Land, buildings and machines necessary to a company's operations are examples of fixed assets. Analyzing fixed assets as a percentage of net worth reveals not only a company's liquidity but possibly the profitability of its operations. When companies have a high fixed asset to net worth ratio, they cannot respond to financial emergencies quickly or free cash for development easily.
Add together the value of all assets. Include all cash, income, investments and property as assets. Separate fixed assets from current assets before adding.
Subtract the value of all liabilities to create a net worth figure. Calculate taxes and subtract them from net worth as well.
Divide the value of fixed assets by net worth to create a fixed asset to net worth ratio.
Interpret high ratios as liquidity problems because the company does not have easy access to cash. Evaluate the company's income to determine if sales income generates adequate income to cover liabilities; if not, operations may be in trouble.
Call the company if figures do not adequately explain a high ratio. Ask if the company has plans to generate more flexible finances.
- "Balance Sheet Basics"; Ronald C. Spurga; 2004
About the Author
Sean Mullin has been creating content for providers such as eHow since 2007. He also worked in an online writing center for college students. In addition to writing, Sean has a Master of Arts in classics and teaches Greek and Latin part-time at the college level.