﻿ Accumulated Depreciation to Fixed Assets Ratio

# Accumulated Depreciation to Fixed Assets Ratio

## 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.