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Measures how well a company replaces its long term, or fixed assets.[sc:kit02 ]
Depreciation to Fixed Assets Formula
Explanation of Depreciation to Fixed Assets
The Depreciation to Fixed Assets ratio measures how diligently the company is replacing its old fixed assets with replacements. Companies will often aquire fixed assets such as new buildings, processes and machinery, and automation with hopes of gaining increased sales over the lifespan of those assets.
Importance of Depreciation to Fixed Assets
An increasing Depreciation to Fixed Assets ratio may indicate the company has purchased new fixed assets, showing the company is making improvements to its operations. A decreasing Depreciation to Fixed Assets ratio may indicate the company’s purchase plans for new fixed assets has stalled, possibly indicating increasingly constrained budgets or a lack of priority of gaining new assets.
The Depreciation to Fixed Assets ratio will vary widely among different industries, and measurement of this ratio needs to be done in the context of the industry the company operates within. Companies in industries whose operations require large purchases of assets that also depreciate rapidly will often record higher amounts of depreciation than companies who either do not purchase many fixed assets, or purchase assets that can be used far beyond the depreciation time span.