EM3098 - Examining Accounts: Business Ratios: Growth in Assets

Growth in assets can be a pointer to how a business is performing:

• Sales / Fixed Assets = Fixed Asset utilisation

What actually goes into fixed assets in this equation will depend upon the nature of the business. If there has been no movement in property it may well be worth looking simply at the utilisation of plant and machinery. The ratio is bound to vary from year to year as replacements and enhancements of old plant are bought in. However, looking at the pattern over a number of years, any significant change in the ratio could indicate a change in the nature of trade. In particular, a significant decline in the ratio would indicate that the business had failed to capitalise on its investment in new assets. This could be because a poor business decision has been made, but it could also be because the profits generated by the new assets are not being fully declared. How is the picture supplemented by other ratios?