The repairs and maintenance expense to fixed assets ratio is a financial metric that measures how much a company spends on maintaining and repairing its fixed assets, such as machinery, equipment, buildings, and vehicles. Fixed assets are long-term assets that are used to generate income for the company and are not easily converted into cash.
The ratio compares the total amount of repairs and maintenance expense to the total value of fixed assets before depreciation. A higher ratio indicates that the company’s fixed assets are older, less efficient, or more prone to breakdowns, which may require more spending on repairs and maintenance. A lower ratio suggests that the company’s fixed assets are newer, more efficient, or more reliable, which may reduce the need for repairs and maintenance.
The ratio can help investors and managers assess the condition and performance of the company’s fixed assets, as well as the adequacy of its capital expenditures. A rising ratio over time may signal that the company is underinvesting in new fixed assets or overusing its existing ones, which may affect its profitability and competitiveness. A declining ratio over time may indicate that the company is investing in new fixed assets or optimizing its usage of existing ones, which may enhance its productivity and profitability.
However, the ratio should not be interpreted in isolation, as it may vary depending on the industry, the nature of the fixed assets, and the accounting policies of the company. For example, some industries may have higher repair and maintenance costs due to the nature of their operations, such as mining, transportation, or manufacturing. Some fixed assets may have longer useful lives or lower depreciation rates than others, which may affect the ratio. Some companies may use different methods of accounting for repairs and maintenance expenses, such as expensing them as incurred or capitalizing them as part of the fixed asset cost, which may also affect the ratio.
Therefore, the ratio should be used with caution and compared with other relevant metrics, such as the accumulated depreciation to fixed assets ratio, the capital to labor ratio, the sales to fixed assets ratio, and the industry averages.
Formula
The formula for calculating the repairs and maintenance expense to fixed assets ratio is:
Where:
- Repairs and Maintenance Expense is the total amount of money spent on maintaining and repairing the fixed assets during a given period, such as a year or a quarter. It can be found on the income statement or in the notes to the financial statements.
- Fixed Assets is the total value of the fixed assets before depreciation at the end of the period. It can be found on the balance sheet or in the notes to the financial statements.
Excel Formula
To calculate the repairs and maintenance expense to fixed assets ratio in Excel, you can use the following formula:
=Repairs_and_Maintenance_Expense/Fixed_Assets
Where:
- Repairs_and_Maintenance_Expense is the cell reference that contains the value of the repairs and maintenance expense for the period.
- Fixed_Assets is the cell reference that contains the value of the fixed assets before depreciation at the end of the period.
For example, if the repairs and maintenance expense for the year is $550,000 and the fixed assets before depreciation at the end of the year is $6,250,000, then the formula in Excel would be:
=550000/6250000
The result would be 0.088, or 8.8%.
Example
To illustrate how to use the repairs and maintenance expense to fixed assets ratio in Excel, let’s consider a hypothetical scenario.
Company ABC is a manufacturing company that produces and sells widgets. The company has the following information for the year 2023:
- Repairs and Maintenance Expense: $450,000
- Fixed Assets before Depreciation: $5,000,000
Using the formula in Excel, we can calculate the repairs and maintenance expense to fixed assets ratio for Company ABC as follows:
=450000/5000000
The result would be 0.09, or 9%.
Interpretation
What does the ratio of 9% mean for Company ABC?
The ratio of 9% means that for every dollar of fixed assets that Company ABC owns, it spends 9 cents on repairs and maintenance. This ratio is slightly below the industry average of 10%, which suggests that Company ABC’s fixed assets are in relatively good condition and do not require excessive spending on repairs and maintenance. However, this ratio may also indicate that Company ABC is not investing enough in new fixed assets or upgrading its existing ones, which may affect its future growth and profitability.
To get a better understanding of the ratio, we can compare it with other relevant metrics, such as the accumulated depreciation to fixed assets ratio, the capital to labor ratio, the sales to fixed assets ratio, and the industry averages.
- The accumulated depreciation to fixed assets ratio measures the proportion of the fixed assets that have been depreciated over time. A higher ratio indicates that the fixed assets are older or more worn out, which may increase the need for repairs and maintenance. A lower ratio suggests that the fixed assets are newer or more valuable, which may reduce the need for repairs and maintenance. For Company ABC, the accumulated depreciation to fixed assets ratio is 40%, which is slightly above the industry average of 35%. This means that Company ABC’s fixed assets are more depreciated than the industry average, which may imply that they are older or less efficient.
- The capital to labor ratio measures the amount of fixed assets per employee. A higher ratio indicates that the company is more capital-intensive, which means that it relies more on fixed assets than on labor to produce its output. A lower ratio suggests that the company is more labor-intensive, which means that it relies more on labor than on fixed assets to produce its output. For Company ABC, the capital to labor ratio is $50,000, which is equal to the industry average. This means that Company ABC has a balanced mix of fixed assets and labor to produce its output.
- The sales to fixed assets ratio measures the efficiency of the fixed assets in generating sales. A higher ratio indicates that the company is able to generate more sales with less fixed assets, which means that it is using its fixed assets more effectively. A lower ratio suggests that the company is able to generate less sales with more fixed assets, which means that it is using its fixed assets less effectively. For Company ABC, the sales to fixed assets ratio is 2.5, which is below the industry average of 3. This means that Company ABC is generating less sales per dollar of fixed assets than the industry average, which may imply that it is not utilizing its fixed assets optimally.
Based on these metrics, we can conclude that Company ABC has a moderate repairs and maintenance expense to fixed assets ratio, which reflects its relatively good condition of its fixed assets, but also its lack of investment in new or upgraded fixed assets. The company may need to increase its capital expenditures to improve its fixed asset efficiency and profitability in the long run.
Conclusion
The repairs and maintenance expense to fixed assets ratio is a useful metric to evaluate the condition and performance of a company’s fixed assets, as well as the adequacy of its capital expenditures. However, the ratio should not be used in isolation, as it may vary depending on the industry, the nature of the fixed assets, and the accounting policies of the company. Therefore, the ratio should be used with caution and compared with other relevant metrics, such as the accumulated depreciation to fixed assets ratio, the capital to labor ratio, the sales to fixed assets ratio, and the industry averages.
Calculator
To help you calculate the repairs and maintenance expense to fixed assets ratio in Excel, I have created a simple calculator for you. You can download it from here. All you need to do is enter the values of the repairs and maintenance expense and the fixed assets before depreciation in the yellow cells, and the calculator will automatically compute the ratio for you in the green cell. You can also compare your ratio with the industry average in the blue cell.
