What it means
Non-current assets are everything the business expects to hold for more than a year: property, plant, equipment, vehicles, intangibles, goodwill and long term investments. Net worth is the owners' permanent capital.
Dividing the first by the second shows how far equity stretches across the least liquid part of the balance sheet. A ratio below 1.0 means equity covers all the long term assets with capital left over to support stock, receivables and daily trading.
Above 1.0 means the excess has been funded by liabilities, and the higher the figure climbs the more the business depends on outside money to hold assets it cannot easily sell. The business risk this highlights is inflexibility.
A company at 1.8 has committed its own capital and a large slice of borrowed money to assets that generate cash slowly, which leaves very little room to respond to a downturn or a sudden opportunity. Analysts often read this ratio as the inverse of the net worth to fixed assets ratio, and the two convey the same information from opposite directions.
The choice between them is usually a matter of house style rather than substance. The nuance is that the ratio says nothing about whether the assets are productive.
A business at 1.5 with fully utilised, revenue generating equipment is in a different position from one at 1.5 whose balance sheet is dominated by goodwill from an acquisition that never delivered.
In practice
Real-world examples.
Example
A dairy processor at 1.9 finds that every dollar of new equity is immediately absorbed by plant upgrades. Its board introduces a rule that the ratio must return below 1.4 before any further capital projects are approved.
Example
A marketing agency reports 0.3 because its balance sheet is mostly cash and unpaid client invoices. The low figure confirms that its capital is available for growth rather than locked into premises and equipment.
Example
A private hospital operator sees the ratio jump from 1.1 to 1.7 after acquiring a competitor, largely because $4,000,000 of goodwill joined the non-current asset total. Its lender asks for the ratio to be recalculated excluding goodwill before agreeing to new facilities.
Think of it
“This shows if your equity investment covers your long-term assets-equity versus fixed investment.
Formula
Calculation
Non-Current Asset to Net Worth Ratio = Non-Current Assets / Net Worth
A plastics moulding company holds non-current assets of $3,600,000: a $2,000,000 factory, $1,300,000 of moulding machines after depreciation and $300,000 of purchased software and licences. Its net worth is $3,000,000.
The ratio is $3,600,000 / $3,000,000 = 1.2, or 120%. The $3,600,000 - $3,000,000 = $600,000 gap has been funded by liabilities rather than owners' capital. If the company then buys a further $1,200,000 of machinery using a bank loan, non-current assets rise to $4,800,000 while net worth is unchanged, and the ratio becomes $4,800,000 / $3,000,000 = 1.6, meaning $1,800,000 of long term assets now rests on borrowed money.Case study
Seen in the real world.
This is an illustrative, fictional scenario. Loxley Print Group, an invented commercial printer, spent four years modernising, buying two large presses and a finishing line for a combined $5,200,000. Non-current assets reached $6,600,000 against net worth of $3,300,000, giving a ratio of 2.0.
The presses were genuinely excellent, but the company had no spare capital. When a competitor collapsed and released a stream of work, Loxley could not fund the extra paper stock and additional shift wages needed to take it on, and most of the business went elsewhere.
In this fictional case the directors sold and leased back one press, releasing $1,400,000 of cash. Non-current assets fell to $6,600,000 - $1,400,000 = $5,200,000 while net worth stayed at $3,300,000, bringing the ratio down to roughly 1.6 and restoring enough flexibility to chase the next opportunity.
Watch out
Common mistakes.
- Leaving goodwill and other intangibles in the numerator without comment, which can make an acquisitive business look far more asset heavy than its physical operations warrant.
- Assuming any figure above 1.0 is a red flag, when long term borrowing matched to long lived assets is a perfectly normal way to finance capital investment.
- Confusing this with the current ratio, which measures short term liquidity and answers an entirely different question.
Questions
People also ask.
What is a reasonable target?
Many analysts prefer to see it below 1.0 for trading businesses, though capital intensive sectors routinely and safely operate above that.
How does it differ from the net worth to fixed assets ratio?
It is the same relationship inverted, and it also captures intangibles and long term investments rather than physical fixed assets alone.
Does a sale and leaseback improve it?
It does, because the asset leaves the balance sheet, but current lease accounting brings much of the value back as a right of use asset, so the improvement is smaller than it once was.
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