Alright. Let's check out another ratio here, the capital acquisitions ratio. So the capital acquisitions ratio here, we're going to be dealing with the capital acquisitions. So this is money that we spend on fixed assets and we want to know how much of our operating cash flows. So the money we the cash that we bring in from our operations, how much of that can cover these fixed asset purchases, alright? So let's look at our ratio right here. In our numerator, we've got the cash flow from operating activities. This comes from the statement of cash flows. That's where we're going to find this number. Remember, our statement of cash flow shows us three sections. The first is the operating section, which shows the cash generated from operations. We are going to have inflows and outflows from operations. Well, that's going to be our numerator here. The next section on our statement of cash flows is the investing section. And this is inflows and outflows from fixed assets, from long-term assets, buying and selling of these long-term assets. And then the last section, the financing section, well that's where we are dealing with our debt holders like the bank or bond holders, as well as our equity, our shareholders, right? So when we pay dividends or we raise money from stock, that's all going to be in the financing section. So we're focused here on those operating cash flows, and then we want to know the cash we paid for our property plant and equipment. Those fixed assets, right? And this also comes from the statement of cash flows, but it's not just the entire investing section. We want to dive in there and see what out of the investing section, where we were paying cash for fixed assets, okay? Now generally, when you do this ratio, you're not going to have to be diving into a statement of cash flows. They're just going to give you the numbers and you just calculate the ratio. So how do we analyze this? What is this ratio really telling us? It's telling us how many times our operating cash flows could cover the cost of these capital expenditures. These cost of fixed assets, right? When we buy fixed assets, we're probably trying to expand our business or maybe it's our machinery deteriorating and we need to buy new ones to keep our business going. Well, we would hope that our operations would be able to generate enough cash to cover these expenditures, right? Now it might not always be the case, right? This could be a case where maybe we're buying so many fixed assets that we're trying to expand our business, right? And maybe it's more than our operations can handle. But we're expecting to expand and be able to generate even more cash in the future. So when we have a ratio below 1, well when we have a ratio below 1, that means that we couldn't cover all of our capital expenditures with just operating cash flows, right? That means we're going to have to finance these fixed assets with other sources. Maybe we're going to have to take on new debt to finance these assets, right? So the higher we get the ratio, well that means we're able to cover these capital expenditures and have money available for other activities, okay? And we'll have less of a need to take on debt. So this is a pretty straightforward ratio, especially in a multiple choice question. So let's go ahead and dive into some practice problems.
Ratios: Capital Acquisition Ratio: Study with Video Lessons, Practice Problems & Examples
Created using AIThe capital acquisitions ratio measures how well operating cash flows cover capital expenditures on fixed assets. It is calculated by dividing cash flow from operating activities by cash spent on property, plant, and equipment. A ratio below 1 indicates insufficient operating cash to cover these costs, potentially requiring financing through debt. Conversely, a higher ratio suggests strong cash generation, allowing for additional investments or reduced reliance on debt. Understanding this ratio is crucial for assessing a company's financial health and investment capacity.
Ratios: Capital Acquisition Ratio
Video transcript
ABC Company's statement of cash flows indicated net cash provided/(used) in operating, investing, and financing activities as $140,000, ($80,000), and $25,000, respectively. If the cash flows from investing activities included the purchase of land for $100,000 and the sale of machinery for $20,000, what is the company's capital acquisitions ratio?
XYZ Company had a capital acquisitions ratio of 3.50. During the period, XYZ purchased equipment with a price of $60,000. If the company had cash inflows from investing activities of $90,000 and cash outflows from financing activities of $30,000, what is the company's cash flow from operating activities?
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What is the capital acquisitions ratio and how is it calculated?
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:
This ratio helps assess a company's ability to finance its capital expenditures from its operating cash flows.
Created using AIWhy is the capital acquisitions ratio important for assessing a company's financial health?
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.
Created using AIWhat does a capital acquisitions ratio below 1 indicate?
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.
Created using AIHow can a company improve its capital acquisitions ratio?
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.
Created using AIWhat are the implications of a high capital acquisitions ratio?
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.
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