This is an ultimate guide on how to calculate Non-Current Assets to Net Worth Ratio with detailed analysis, example, and interpretation. You will learn how to use its formula to assess a business solvency.
Definition- What is Non-Current Assets to Net Worth Ratio?
The non-current assets to net worth ratio, or the fixed assets to net worth ratio, measures how much of a company’s investments are tied up in fixed or non-current assets.
Fixed assets include those that are low-liquid such as plant and equipment, properties and investments made in intangible assets.
These types of assets are usually not expected to be converted into cash within a single year and are also known as long-term assets.
An acceptable non-current assets to net worth ratio should be 1.25 or lower, as anything above this could mean that the company is highly illiquid and is therefore vulnerable to unexpected events.
Likewise, a ratio of between 1.25 to 1.50 and above might be considered of concern to investors as it could suggest that the business is relying too heavily on low liquid assets that they might have difficulty converting if needed.
It is worth noting that this will, however, vary from industry to industry.
And you must be aware that for capital intensive industries, such as manufacturing, this ratio might be higher but should not necessarily be deemed negative.
The formula to measure the non-current assets to net worth is as follows:
Non-Current Asset to Net Worth = Non-Current Assets / Net Worth
So how can you calculate a business net worth?
You can use this formula to estimate the net worth of a company:
Net Worth = Total Assets - Total LiabilitiesYou can easily find all of these numbers reported on a firm’s balance sheet.
Okay now let’s take a look at a quick example so you can see exactly how to calculate the non-current assets to business net worth ratio.
Assume that you are considering to invest in Company DFA, which is a car manufacturing company and it has a net worth of $165,000 and non-current assets estimated to be worth $230,000.
To determine the net current assets to net worth, we need to substitute into the formula:
As you can see that DFA Company’s ratio is 1.39, which is above the recommended value of 1.25 as a maximum.
Interpretation & Analysis
As we have previously stated, 1.39 would be a cause for concern. However, DFA Company is a manufacturing business.
Subsequently, we would need to make comparisons to other similar companies within the industry to understand the actual impact of this ratio.
Let’s take for example Company LCG who is also a car manufacturer.
They have a net worth of $250,000 and fixed assets of $300,000 giving them a ratio of 1.2 ($300,000 / $250,000) which would be relatively high but within the acceptable threshold.
This would be bad news for Company DFA as it would suggest that they are relying too heavily on low liquid assets and might be unable to respond to unexpected changes that might require them to use liquid assets.
Cautions & Further Explanation
As with other ratios that measure the solvency, performance and profitability of a company, you should treat the non-current asset to net worth ratio as a measure that should be used alongside others in order to obtain a wider, detailed view of the business.
On its own, it is without context and must be compared to other companies within the same industry.
As we saw from the example, DFA Company, being a car manufacturing business, made us question the implications of the result and it is only from comparison to another company that we can be sure it isn't an acceptable measure.