Cash flow to fixed asset requirements is a ratio that measures how well a company can generate cash from its fixed assets, such as property, plant, and equipment (PP&E). It is calculated by dividing the free cash flow (FCF) by the net fixed assets. FCF is the cash flow available to the company after paying for operating expenses and capital expenditures (CapEx). Net fixed assets are the total value of fixed assets minus accumulated depreciation.
The formula for cash flow to fixed asset requirements is:
To calculate this ratio in Excel, you need to have the following data:
- Free cash flow (FCF): You can use the formula
=EBIT*(1-Tax rate)+Depreciation-CapEx-Change in net working capitalto calculate FCF, where EBIT is the earnings before interest and taxes, tax rate is the effective tax rate, depreciation is the depreciation expense, CapEx is the capital expenditure, and change in net working capital is the difference between current assets and current liabilities. - Net fixed assets: You can use the formula
=PP&E-Accumulated depreciationto calculate net fixed assets, where PP&E is the property, plant, and equipment, and accumulated depreciation is the total depreciation of fixed assets.
Here is an example of how to calculate cash flow to fixed asset requirements in Excel, using some hypothetical data:
| Item | Amount |
|---|---|
| EBIT | $100,000 |
| Tax rate | 25% |
| Depreciation | $20,000 |
| CapEx | $30,000 |
| Change in net working capital | $10,000 |
| PP&E | $200,000 |
| Accumulated depreciation | $50,000 |
To calculate FCF, enter the formula =100000*(1-0.25)+20000-30000-10000 into cell B9. The result is $45,000.
To calculate net fixed assets, enter the formula =200000-50000 into cell B10. The result is $150,000.
To calculate cash flow to fixed asset requirements, enter the formula =B9/B10 into cell B11. The result is 0.3.
This means that the company can generate $0.3 of cash flow for every $1 of net fixed assets.
A higher ratio indicates that the company is more efficient in using its fixed assets to generate cash flow. A lower ratio may suggest that the company has overinvested in fixed assets, or that its fixed assets are not generating enough cash flow.
