Ratios: Capital Acquisition Ratio: Videos & Practice Problems

The capital acquisitions ratio measures how well a company's operating cash flows cover its capital expenditures on fixed assets. It is calculated by dividing the cash flow from operating activities by the cash spent on property, plant, and equipment (PPE). The formula is:

$\frac{\mathrm{Cash} \mathrm{Flow} \mathrm{from} \mathrm{Operating} \mathrm{Activities}}{\mathrm{Cash} \mathrm{Spent} \mathrm{on} \mathrm{PPE}}$

This ratio helps assess a company's ability to finance its capital expenditures from its operating cash flows.

The capital acquisitions ratio is crucial for assessing a company's financial health because it indicates how well the company can cover its capital expenditures using its operating cash flows. A ratio above 1 suggests that the company generates sufficient cash from operations to fund its investments in fixed assets, reducing the need for external financing. Conversely, a ratio below 1 indicates that the company may need to rely on debt or equity financing to cover its capital expenditures, which could impact its financial stability and increase its financial risk.

A capital acquisitions ratio below 1 indicates that a company's operating cash flows are insufficient to cover its capital expenditures on fixed assets. This means the company may need to seek additional financing, such as taking on new debt or issuing equity, to fund these expenditures. While this could be a sign of financial strain, it might also indicate that the company is investing heavily in growth and expansion, expecting future cash flows to improve.

A company can improve its capital acquisitions ratio by increasing its operating cash flows or reducing its capital expenditures. To increase operating cash flows, the company can focus on boosting sales, improving profit margins, and managing working capital more efficiently. Reducing capital expenditures can be achieved by delaying or scaling back investments in fixed assets, or by finding more cost-effective ways to maintain and upgrade existing assets. Both strategies can help the company better cover its capital expenditures with its operating cash flows.

A high capital acquisitions ratio implies that a company generates ample operating cash flows to cover its capital expenditures on fixed assets. This indicates strong financial health and operational efficiency, as the company can fund its investments without relying heavily on external financing. A high ratio also suggests that the company has additional cash available for other activities, such as paying down debt, distributing dividends, or investing in new opportunities. Overall, a high capital acquisitions ratio is a positive sign for investors and stakeholders.