And to estimate the average remaining life of a company’s asset base, the net PPE is divided by depreciation expense.Ĭomparing a company’s annual capital expenditures to its annual depreciation expense can also indicate whether or not the company’s production capacity is being maintained. The average age of a company’s asset base can be estimated as accumulated depreciation divided by depreciation expense. The older the assets and the shorter the remaining useful life, the more a company may need to reinvest to maintain production capacity. The asset age, and remaining useful life ratios, are two significant indicators of a company’s need to reinvest in its production capacity. The higher the ratio, the more sales a company can generate with a given amount of investment in fixed assets.Īsset age ratios rely on the relationship between historical cost and depreciation. The fixed asset turnover ratio, which is computed by dividing total revenue by average net fixed assets, reflects the relationship between total revenues and investment in property, plant, and equipment (PPE). The ratios can be useful in the analysis of aspects of fixed assets such as the fixed asset turnover ratio and several asset age ratios. Analysis and Interpretation of Financial Statement Disclosures Relating to Property, Plant, Equipment, and Intangible Assetsįinancial statement disclosures can be used to compute various financial ratios. Financial statement disclosures divulge such details as how those investments have changed during a reporting period, how the changes have affected the company’s current financial performance, and the implications the changes might have on the expected future performance of the company. Users of financial statements can use financial statement disclosures to deepen their understanding of a company’s investments in tangible and intangible assets.
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