What is a Non-current asset to Net worth?
A non-current asset to net worth ratio is a debt financial ratio to measure of the extent of a company’s investment in low-liquid non-current assets.
This ratio is very significant for comparative analysis of less dependent on industry (structure of company assets) and debt ratio or debt-to-equity ratio.
What Are Non-Current Assets?
Non-Current assets are a company’s long-term investments for which the full value will not be realized within the accounting year.
Non-Current assets comprise investments in other companies, intellectual property (e.g. patents), and property, plant and equipment. You can find Non-Current assets on a company’s balance sheet.
Few examples of Non-Current assets that are stated in a company’s balance sheet are:
– Plants and properties;
– Investments made in another company;
– Investments in brand recognition, intellectual property rights;
– Equipment with a high value or that is used over a period greater than one year, which is not considered inventories.
The net worth figure of an entity is determined by subtracting the total outside liabilities from total assets figure.
Read| Accounting Ratio
What Is Net Worth?
Net worth is the value of the abstract from assets a person or corporation minus its liabilities.
It is a significant metric to determine a company’s health and it provides a good idea about the firm’s current financial position.
Advantage of Non-current assets to net worth
- Net worth is popularly called as book value or shareholders’ equity.
- Non-Current assets are called as long-term assets.
- Non-Current asset costs are allocated over the number of years the asset is used.
- Non-Current assets are on the balance sheet under investment: property, plant, and equipment; intangible assets; or other assets.
- Net worth produces a picture of an entity’s present financial position.
- People with extensive net worth are known as high-net-worth individuals (HNI).
Disadvantage of Non-current assets to net worth
- A high ratio may be interpreted as a negative signal.
- It does not include in the business cycle
- Non-Current assets are not used for current use.
Calculation (formula) of Non-current assets to net worth
Example of Non-current assets to net worth ratio
If a XYZ company has Non-Current assets estimated to worth $100,000 and a net worth of $90,000.
Non-Current Assets to Net Worth = $100,000/$90,000 = 1.11 (in % i.e. 111.11%)
This is an acceptable proportion under the given benchmark
Let’s take another example to clear the situation of the company,
If a Grocery company has Non-Current assets estimated to worth $90,000 and a net worth of $100,000.
Non-Current Assets to Net Worth = $90,000/$100,000 = 0.90 (in % i.e. 90%)
This is, now, an acceptable proportion and given grocery store easily pays and grow the business under any stressful situation.
Interpretation and Analysis of Non-current assets to Net worth ratio
The standard acceptable Non-current asset to Net Worth ratio is between 1-1.25 and lower, but it is still dependent on the type of industry.
For capital-intensive industries (i.e. The industries with a high portion of non-current assets against current assets) the ratio may be higher.
Typically, any level lower or between 1 and 1.25 (100% – 125%) is considered to be normal but please note that this range varies from one industry, market or economic environment to another.
While a too high ratio may be interpreted as a negative signal because it may indicate that the company in question relies too much on low liquid assets and so whenever required it will have difficulties in converting these assets in liquid instruments.