The level of use of fixed production assets is characterized by Capital productivity and capital intensity

2024 Author: Henry Conors | [email protected]. Last modified: 2024-02-12 02:42

Any, even the smallest production, requires certain equipment, tools, inventory, etc. Everything that is used by an enterprise to carry out its activities is commonly called fixed assets. The cost expression of this indicator is also called fixed assets. To assess the overall performance of the enterprise, it is necessary, among other things, to analyze the level of use of fixed production assets. This indicator is characterized by several coefficients - capital intensity and capital productivity.

Cost calculation

The cost of production assets, which accounts for a unit of output in monetary terms (for example, for 1 ruble of finished products) is called capital intensity. Simply put, this indicator characterizes how much equipment, tools, special equipment, etc. are needed in order to manufacture goods for 1 ruble. This ratio helps determine how muchfixed assets are required to produce the desired volume of products. This is especially true when the company intends to expand production.

Profit determination

Return on fixed assets is a coefficient opposite to capital intensity and reflects how much profit the company receives from the cost unit of fixed assets. In other words, this indicator quantitatively characterizes how much money brings, for example, 1 ruble invested in equipment, inventory, tools, etc. This coefficient is one of the most important when analyzing the efficiency of an enterprise.

Influencing factors

Return on assets and capital intensity are not absolute indicators. There are several factors that affect their value and distort the real values:

• Working time of the enterprise: when the equipment is used around the clock in a constant quantity and mode, the capital intensity reflects a more realistic picture, but in the event of downtime or temporary addition of auxiliary funds, the indicator will change significantly, and its result cannot be considered absolutely correct.
• When determining the coefficients, it is assumed that all fixed assets are used for their intended purpose and at the maximum effective capacity.
• Sales volumes: when calculating the return on assets, the indicator of sold products is taken into account, which, in turn, significantly depends on the work of the company's management, sales department, etc.

The coefficients under consideration characterize the level of use of fixed production assets without taking into account significant changes in the cost of products that do not depend on production volumes. For example, a sharp unpredictable inflation (an increase in prices for raw materials, a decrease in demand for finished goods due to its rise in price, etc.) or legislative changes (restrictions and quotas on production, a ban on imports or exports, etc.). Therefore, in non-standard conditions, these indicators are not applicable.

Calculation

Indicators of fixed production assets are usually calculated using data from the financial statements of the enterprise, compiled in accordance with the requirements of state (national) or international reporting. Indicators from internal company documents are also used, but much less frequently. The calculation is quite simple and follows directly from the definitions of these coefficients.

Return on assets is the ratio of revenue to the average cost of fixed assets. The result is obtained by simple division.

Capital intensity is calculated as the ratio of the average annual cost of fixed assets to the amount of revenue. Also, this indicator is inverse to return on assets.

To get the average annual value of fixed assets, you need to add the data at the beginning of the year and at the end of the year, and then divide by 2. In this case, most often the primary cost (acquisition cost) is taken into account, but sometimes adjustments are made (for example, if equipment was purchased in foreign currency, the exchange rate of which is significantlychanged).

Ratio analysis

The level of use of fixed production assets is characterized by indicators for the purpose of further study and decision-making that will contribute to the development of the enterprise and increase profits. Of course, when analyzing, it is worth considering the features of products, the mode of operation of production, the situation in the industry, etc. But there are also some trends that are common to all. For example, if capital productivity and capital intensity increase over time, then this is a sign of a decrease in the efficiency of the enterprise. Perhaps there is a need to update fixed assets due to their wear and tear or obsolescence (physical or moral). Or the reason lies in the inefficiency of the use of equipment. In any case, the growth of these coefficients should alert. In addition, it is worth considering the values of the indicator in comparison with the industry average value (it can be taken on the websites of state statistics). For example, if the value of capital intensity by growth exceeds the average value for the industry, then production efficiency falls, if vice versa, it grows.

Features of indicators

The considered indicators characterize the level of use of fixed production assets quite well, but the analysis should take into account several important points. Firstly, when calculating and analyzing capital intensity, it is assumed that all equipment, inventory, tools, etc. are used rationally and competently, and the output volume does not have a significantdependence on the intellectual labor of workers. Otherwise, before calculating this ratio, it is necessary to audit the use of fixed assets, identify hidden reserves and take these data into account in the analysis. In addition, do not forget to take into account in the calculations those fixed assets that are leased by the enterprise, but those that are leased and do not participate in the production process, on the contrary, should be deducted from the total cost of funds.