There is great value to be realized from an organisation successfully maintaining and managing its fixed assets. Significant financial outlay is required to purchase new equipment and, all too often, businesses are forced to buy new equipment because there has been inadequate commitment to, and investment in, maintaining existing assets to an optimised standard of operation.
In light of this, the Repairs to Fixed Assets Ratio can provide useful information about the extent of costs associated with total operational assets.
Calculation of the Repairs to Fixed Assets Ratio
It is not uncommon for repairs to be recorded in financial reports and analysis of organisational expenditure. However, it is important that records are kept and repairs expenses are viewed in light of total asset value. When calculating the Repairs to Fixed Assets Ratio, the formula that is required is:
Total repairs and maintenance expenses / Total fixed assets before depreciation expenses are deducted.
Interpreting results from the Repairs to Fixed Assets Ratio:
In the event that a significantly high percentage of the original value of the asset is being spent on repairs, this may be all the evidence required to prove that the asset needs to be replaced or upgraded. However, a more complete analysis of the situation and application of business intelligence tools may reveal other pertinent information, such as the high cost of maintaining a piece of equipment in difficult or harsh conditions. If equipment is repeatedly operated in a harsh environment, more frequent and potentially expensive repairs are likely.
For other businesses, failure to repair, upgrade or replace equipment that demands high levels of maintenance may indicate that a business is experiencing difficulty in generating the finances necessary to buy new equipment. Of course, a range of factors could cause this situation, but one possible cause is entrenched systematic problems that negatively affect the company.
If application of this ratio shows that a business experiences high repair costs, the conclusion can generally be made that it is operating inefficiently and would potentially benefit from investing in newer, more efficient and perhaps higher quality equipment that can be run more cost effectively. Purchasing such equipment often represents a good way to redress the cost disadvantage experienced by a business.
A word of caution about use of the ratio:
While the Repairs to Fixed Assets Ratio can provide relevant and useful information, interpretation must be carefully made. Some confusion can arise when the same ratio suggests both positive and negative activity. To explain this further, a low-repair ratio may well suggest that a business is committed to the reliable and regular maintenance of its assets and invests in high-quality, durable assets. Conversely, it could also have been achieved because management has deliberately delayed repairs until after the reporting period or because it is anticipating the complete replacement of old for new assets.
A high Repair to Fixed Assets Ratio may show that management is dedicated to the provision of high quality assets and/or is effectively maintaining assets. As has been previously mentioned, it may also indicate that the rapid deterioration of assets is due to difficult and harsh operating conditions.
Information about the success or otherwise of a company’s asset maintenance approach can come from a variety of sources and the ratio outlined can produce some useful data. However, in order to completely and meaningfully analyse, interpret and account for repair expenses and the cost effectiveness of keeping and maintaining the fixed assets owned by the organisation, it is appropriate to factor in the way that repairs personnel are contracted and refer to the repairs schedule of the company.