Non-Current Assets to Net Worth Ratio
Non-current assets to net worth ratio is an indicator comparing the value of non-current or long-term assets of a company to its net worth. Net worth can be thought of as the true value of an entity and its value can be obtained by subtracting liabilities from total assets. In other words, the ratio is comparing long-term assets with the portion of assets that a business truly owns.
A high non-current assets to net worth ratio can mean three things. First, a company may have more non-current assets—whether they are physical or non-physical—than most other companies. This case is normal for capital-intensive companies that rely heavily on long-term investments to operate effectively.
In another case, most of its assets are possibly in the form of debt, which means that the company is more prone to financial trouble during its operation. Finally, it can be the combination of both cases, even though this doesn’t necessarily mean the company is in a bad shape.
Non-Current Assets to Net Worth Formula
The first variable we need is non-current assets. Non-current assets are fixed assets: long-term investments whose full value won’t be depleted in a single year. You’ll also see this term referred to as long-term assets; both mean the same thing.
Non-current assets can be either tangible or intangible. Some of the examples of tangible non-current assets include property, plant, & equipment (PP&E) and monetary investments. Meanwhile, intangible assets consist of intellectual properties (e.g. copyrights and patents), brand reputation, and other untouchable assets like software.
Basically, non-current assets comprise assets that are expected to be used or capitalized for several years. They are different from current assets that are expended within a year like goods to be sold and cash and cash equivalents.
Another variable needed to calculate the formula is net worth. As mentioned before, net worth equals assets minus liabilities and net worth is essentially the total equity of the company.
Since net worth is the same as equity here, specifically shareholders’ equity, we can simply use shareholders’ equity instead of net worth in the formula:
All of the figures required to calculate non-current assets to net worth ratio can be found on the balance sheet.
Non-Current Assets to Net Worth Ratio Example
Let’s take a look at the 2019’s balance sheet of the American e-commerce corporation, eSale Inc. While it doesn’t explicitly state non-current assets, we can identify and combine the value of all assets that are categorized as long-term assets. These are net property, plant & equipment, total investments & advances, intangible assets, and other assets.
After adding all of the variables together, we can get the value of non-current assets, which is $9,091 million.
On the other hand, the amount of net worth or shareholders’ equity can be found easily. It is located at the bottom of the balance sheet and valued at $2,870 million. Now, what are the non-current assets to net worth ratio of eSale Inc.?
Let’s break it down to identify the meaning and value of the different variables in this problem.
- Non-current assets = 9,091
- Net worth = 2,870
Now let’s use our formula and apply the values to our variables to calculate non-current assets to net worth ratio:
In this case, the non-current assets to net worth ratio would be 3.1676. From this result, we can see that the non-current assets of eSale are worth at least three times more than its shareholders’ equity. We can conclude that most of the company’s assets are liabilities.
Generally, this result would be concerning and the company might be at risk. However, for comparison, we can look at competitors from the same industry as well as the corporation’s own past results. For example, let’s say iMarket.com has a non-current assets to net worth ratio of 2.077. This is not too far off from eSale Inc.
Non-Current Assets to Net Worth Ratio Analysis
Non-current assets to net worth can be useful to estimate the amount of shareholders’ equity used to finance a business operation. A high ratio implies that the majority source of a company’s long-term investments is in the form of debt. To get a more comprehensive look, however, you need to inspect the balance sheet thoroughly to see which assets impact the calculation the most.
The biggest downside of this ratio is that it doesn’t provide much utility in any situation compared to other ratios. If you want to measure the leverage of a business, you can use more fitting ratios such as Long-term Debt to Assets or Debt to Equity ratio.
If you want to gauge a firm’s profitability, you can use the Net Profit Margin or Operating Margin. Additionally, other ratios provide a decent perspective to a company’s profitability relative to its debt, i.e., Debt to EBITDA ratio. To put it simply, many other indicators can offer us better information, although non-current assets to net worth can still be helpful as a supplementary ratio.
To get the best outcome, you can compare the result of one company against other businesses within the same industry and its own past ratios. This is true for most financial ratios out there. We’ve already seen one example when we compare non-current assets to the net worth ratio of eSale and iMarket.com.
You can also look at eSale’s historical ratios, e.g. from 2017 and 2018, and compare it from the most recent results (2019) to see if the ratio is decreasing or increasing.
Non-Current Assets to Net Worth Ratio Conclusion
- The non-current assets to net worth ratio is a metric comparing the value of a business’s non-current assets against its net worth.
- The formula for non-current assets to net worth ratio requires 2 variables: non-current assets and net worth.
- Net worth is the same as shareholders’ equity, which is the portion of assets a company legitimately owns.
- Non-current assets to net worth ratio is not the ideal indicator in almost all situations, there are most likely more effective measurements in each scenario.
Non-Current Assets to Net Worth Ratio Calculator
You can use the non-current assets to net worth ratio calculator below to quickly compare the value of a business’s non-current assets against its net worth by entering the required numbers.
1. What is a non-current assets to net worth ratio?
The non-current assets to net worth ratio is a metric comparing the value of a business’s non-current assets against its net worth.
2. How do you calculate for non-current assets to net worth ratio?
The formula for non-current assets to net worth ratio is: Non-Current Assets / Net Worth.
3. What are non-current assets?
Non-current assets are defined as long-term investments or assets a company owns that won’t be converted into cash within 12 months.
4. What does the non-current assets to net worth ratio show you?
The non-current assets to net worth ratio indicate the percentage of shareholders’ equity used to finance a business operation.
5. What are the advantages and disadvantages of non-current assets to net worth?
The biggest advantage of the non-current assets to net worth ratio is its simplicity. It can be used in most situations where you want to measure a company’s leverage or profitability. The main disadvantage of this ratio is that it doesn’t provide much utility in any situation compared to other ratios. Additionally, there are many other indicators that can offer better information.