Written by True Tamplin, BSc, CEPF®
Updated on September 17, 2021
Fixed assets as a percentage of capital employed indicates what portion of the total capital employed is held in the form of fixed assets.
Obviously, this percentage is very high in industrial or manufacturing companies. It is typically very low for trading or service-related businesses.
Fixed assets are non-current, physical long term assets that are held for use in the production or supply of goods and services, for rental to others, or for administrative purposes and that are expected to provide economic benefit for more than one year. They are not inventories nor are they intangibles such as goodwill. Examples are land, buildings, machinery, equipment, furniture and fittings.
Capital employed is defined as total shareholders' equity plus long term debt. It is the total amount invested in the company by the shareholders or borrowed from creditors for use in the business.
Knowing what percentage of the total capital is held in the form of long term assets helps management to determine how much money should be reinvested back into the business versus distributed to shareholders. It can also be useful when comparing companies within similar industry sectors or for benchmarking purposes.
Calculating fixed assets as a percentage of capital employed is very easy. Just take the total fixed asset value and divide it by the capital employed figure. For example, ABC Ltd had fixed assets worth RM500,000 at the end of its financial year while its capital employed was RM2,000,000. This means that fixed assets represent 2% of capital employed.
If the percentage is high then it suggests that the business is making good use of its capital by investing in physical assets rather than higher yielding, but more risky investments such as research and development or intangibles. However, it is important to remember that this percentage can change quite quickly depending on the business cycle.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website, view his author profile on Amazon, his interview on CBS, or check out his speaker profile on the CFA Institute website.