What Are Derivatives ?
If you are connected to any kind of financial market or watch the financial news even for 5 minutes every day, it is likely that you have heard the word, financial derivatives many times. The media is flush with articles wherein derivatives are criticized or appreciated. Most of the times, commentators are in awe of […]
Two Fundamental Rules of Corporate Finance
Corporate finance is based on two fundamental rules. All tools and techniques of corporate finance are mere ways and means of implementing these rules. These rules can be found at the beginning of any and every corporate finance text book. One of these rules relates to the concept of return while the other relates to […]
How are Losses Treated in Corporate Tax?
Corporate income tax is collected when there is corporate income i.e. when the revenue collected by the corporation exceeds the expenses incurred by this. However, this need not always be the case. It is equally possible that a corporation may incur more expenses than it earns in revenue, thereby incurring a loss. This is truer […]
Will The Fiat Money System Collapse?
In 1971, Richard Nixon single-handedly took the world off the gold standard. Ever since, many commentators have been of the opinion that the monetary system of the world will face a complete collapse. These fears get exaggerated every time there is a crisis. For instance, during the 2008 crisis, many people felt that the dollar […]
Phases of Growth and Valuation Models
Dividend discount models are based on the assumption of constant or linear growth. However, a mere look at the empirical data will prove that this is not the case in reality. Growth is almost never linear or constant. In fact, in strategic management, the concept of product or company life cycle is taught wherein there […]
Equity to Fixed Assets Ratio = Equity / Total Fixed Assets
The “equity to fixed assets” ratio shows analysts the relative exposure of shareholders and debt holders to the fixed assets of the firm. Thus, if the “equity to fixed assets” ratio is 0.9, this means that shareholders have financed 90% of the fixed assets of the company. The remaining 10% as well as current assets and investments have all been financed by debt holders.
There is an implicit assumption that the number of shares outstanding has remained unchanged. This is because the ratio measures the total amount of equity. The total amount of equity can be increased by issuing shares at lower prices to the public or to the promoters. However, this may not be a desirable scenario since more shares means a loss to individual shareholders.
The “equity to fixed assets” ratio is used by a variety of stakeholders for different purposes. The common interpretations that are drawn based on this ratio have been listed below:
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