Assets structure ratio
Method of calculation
This ratio is the basic ratio of assets structure, calculated during the vertical analysis of the balance sheet. The level of the ratio depends on the industry branch in which the company operates – production companies have higher values, while trade companies have lower values. The value above 1 indicates that fixed assets are greater than current assets.
- When assessing the changes in ratio's value over time (over few periods):
- the increase of ratio's value is interpreted as the strengthening of company's production capabilities, but it also indicates lowered flexibility (due to the strengthening of fixed assets base) – the decrease of flexibility may lead to the decrease of profitability (an increase of fixed costs) and the worsening of financial liquidity,
- the decrease of ratio's value is interpreted respectively as the weakening of production capabilities, but with the improvement of company's flexibility.