What are Net Fixed Assets?
Net Fixed Assets is a valuation of the net book value of all fixed assets. This is done by taking the historical cost of the the assets and subtracting depreciation.
Think of a car that you have purchased. You may of bought it new for $20k. Two years later that car is worth $14k. So the net fixed asset value would now be $14k. ($20k minus $6k in depreciation.)
When looking at this valuation, a low net book value compared to a high historical cost would suggest that the assets are nearing the end of their useful life.
Management may not use this metric as a low net book value does not mean that the asset is nearly useless.
As an example you bought a piece of machinery for $100k nine years ago, and it’s now got a net book value of $10k. Looking at the numbers it would suggest that this machinery only has one more year before it’s not worth anything. After talking to the machine operator and mechanics, it may turn out that the machine is working perfectly well, and with good maintenance may have another ten years of usability.
Meanwhile, Investors will use this metric. As they won’t necessarily have access to the people who can tell them how long the machinery will last, they can use Net Fixed Assets as a guide – as the finance team should discuss with operations and understand how long that machinery, vehicle or factory will be useful for.
This metric allows them to measure how good management is at using it’s assets (If expensive equipment is depreciating very quickly whilst a competitors isn’t – maybe they are doing something wrong!). It also helps investors in deciding whether to acquire the business. As they may be reluctant to fund lots of old equipment being replaced.
Calculating Net Fixed Assets
The simple calculation is Total Fixed Assets minus Depreciation. Accountants and investors often take this calculation a step further and take fixed asset liabilities away from the value as well. This lets you see how much of assets the company actually owns.
The Net Fixed Assets Ratio lets you calculate how much value of the asset is left as a percentage of the original total value.
Example
Cola Koala is the biggest Cola company in Australia and they are looking to acquire their biggest competitor – Colagator Drinks.
As part of the acquisition, due diligence is being done, and Cola Koala are interested in the Fixed Assets of Colagator.
Looking at the fixed assets register, they have noted the following.
- Total fixed assets: $12,500,000
- Depreciation: $7,000,000
- Leasehold improvements: $1,000,000
- Total Fixed Assets Liabilities: $2,000,000
So using our Net Fixed assets formula we can calculate the actual amount of the assets that the business owns!
Net Fixed Assets = ($12,500,00 + $1,000,000) – ($7,000,000 + $2,000,000)
Which gives us an answer of $4,500,000.
Cola Koala then look at their Net Fixed Assets ratio.
Net Fixed Assets Ratio = $4,500,000/$13,500,000
This gives us an answer of 33%. This shows us that the assets have depreciated by 67% of their original cost. This means that Colagator may need to look into replacing some of the assets in the near future.
Summary
While a useful tool for evaluating a businesses value for investors and, it offers little practical use to management. Depreciation is a requirement in accounting and it can be difficult to be accurate especially when assets can last such a long time. Buildings and some equipment can lost many times longer than their expected useful life.