What it means
Long-term debt is normally raised to buy assets that will earn money for many years, so it is reasonable to check whether those assets are still there and still worth something. This ratio makes that check explicit by dividing net fixed assets by long-term debt.
A result above 1.0 means the fixed asset base exceeds the long-term borrowing, which gives a lender a cushion. A result below 1.0 means part of the long-term debt is backed by something other than physical assets, such as goodwill, working capital or simply the promise of future trading profits.
In practice the ratio appears in credit reviews, loan covenant packs and asset-based lending decisions. A bank considering a ten-year facility on a distribution depot will look at this figure to judge how much of its exposure could be recovered from the buildings and vehicle fleet in a forced sale.
The figure is calculated on net book value, which is cost less accumulated depreciation, and that is the ratio's biggest weakness. Book value can sit far below market value for older freehold property and far above it for specialised machinery that nobody else wants.
The sensible range varies enormously by sector. A shipping line or hotel group may run comfortably above 2.0, while a consultancy with leased offices might barely register a ratio at all, which is exactly why it is judged against sector peers rather than an absolute benchmark.
In practice
Real-world examples.
Example
A regional haulier applies for a $4,000,000 facility to buy trucks. Its net fixed assets of $11,000,000 against existing long-term debt of $5,000,000 gives a ratio of 2.2, and the bank approves the loan because even after drawdown the ratio stays at a comfortable 1.67.
Example
A hotel group's ratio slips from 1.8 to 1.1 after a decade of depreciation on properties that were never revalued. The finance director commissions an independent valuation showing market values well above book, and presents both figures in the annual credit review.
Example
A software business seeking long-term debt finds lenders unwilling to offer more than a small facility because its ratio is close to 0.1. It ends up raising equity instead, since almost none of its value sits in assets a lender could sell.
Think of it
“This ratio shows if your fixed assets could cover your long-term debt-collateral perspective.
Formula
Calculation
Fixed Asset to Long-Term Debt Ratio = Net fixed assets / Long-term debt
Worked example: a cold storage operator reports property, plant and equipment at a cost of $26,000,000 with accumulated depreciation of $8,000,000, giving net fixed assets of $26,000,000 - $8,000,000 = $18,000,000. Its long-term debt consists of a $12,000,000 term loan repayable over eight years.
The ratio is $18,000,000 / $12,000,000 = 1.5. In words, there is $1.50 of net fixed assets behind every $1.00 of long-term borrowing.
Suppose the company then borrows a further $6,000,000 to fund an acquisition of a services business with no significant fixed assets. Long-term debt rises to $18,000,000 while net fixed assets stay at $18,000,000, so the ratio falls to $18,000,000 / $18,000,000 = 1.0. The lender's asset cover has been halved by a deal that added no security, which is precisely the shift a covenant on this ratio is designed to catch.Case study
Seen in the real world.
Meridian Grain Handling is a fictional bulk storage company used here as an illustrative example. It operated four silo complexes carried at a net book value of $30,000,000 and held $15,000,000 of long-term debt, giving a comfortable ratio of 2.0 that its bank had never questioned.
The board then acquired a grain trading business for $18,000,000, funded entirely by extending the term loan. Almost the whole purchase price landed on the balance sheet as goodwill and customer relationships, so net fixed assets stayed flat while long-term debt rose to $33,000,000. The ratio fell to about 0.91, and the bank's annual review flagged it as the largest single change in the credit file.
The outcome in this illustrative story was not a refusal but a repricing, with the margin on the facility rising and a new covenant set at a minimum ratio of 0.75. Meridian's finance director later described the episode as a useful reminder that the balance sheet mix, not just the total debt, is what a secured lender actually cares about.
Watch out
Common mistakes.
- Using gross fixed assets at cost rather than net book value, which flatters the ratio by ignoring years of depreciation.
- Including short-term borrowings and overdrafts in the denominator when the measure is specifically about long-dated debt.
- Treating a high ratio as automatically good, when it can simply mean the business is tying up capital in assets that earn poor returns.
Questions
People also ask.
Should right-of-use lease assets be included in fixed assets?
Practice varies, so state your basis clearly, and be consistent if the corresponding lease liability sits in long-term debt.
What ratio will a lender expect?
Secured lenders often look for at least 1.0 on asset-backed facilities, but the threshold is negotiated deal by deal and depends heavily on how saleable the assets are.
Is this the same as the fixed asset to net worth ratio?
No, that measure compares fixed assets with shareholders' equity rather than with borrowings, and answers a question about owner funding rather than loan security.
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