Fixed Asset Turnover Ratio

Fixed assets, including property, equipment, and plant, represent a company's investment operations. Therefore, a company needs to track these investments and analyze whether it is generating sales and profit to justify its spending.

It is impossible to determine a company's ability to invest and utilize fixed assets to generate net sales. Here, the fixed asset turnover ratio provides answer.

To get more about the fixed asset turnover ratio, its formula, calculation, and which ratio is a good indication, keep reading.

What is fixed asset turnover?

Fixed asset turnover, is an efficiency ratio that indicates your company's well or under-performance in generating sales.

Companies can evaluate the efficiency of their management for investing in fixed assets. A high turnover ratio indicates that a company uses a small number of fixed assets with highly developed sales. Moreover, higher ratios can be risky as you ignore investment opportunities or sell off more of your fixed assets.

What does fixed asset turnover tell you?

Fixed asset turnover helps lenders, investors, creditors, and management determine whether the business is growing well and using its fixed assets efficiently. It enables them to make crucial decisions regarding their investment plans.

Fixed asset turnover is valuable for analyzing the company's growth. It will tell you whether your augmenting sales are more or less than your asset bases. Investors with capital-intensive businesses are more likely to benefit from fixed asset turnover as it helps them calculate the profit they will get on investments.

What is the formula for fixed asset turnover?

The fixed asset turnover ratio is shown and calculated by the following equation:

Fixed asset turnover =

Net revenue/net fixed assets (average of the two balance sheets)

Net revenue

Net revenue or net sales is the figure acquired after deducting all sales returns. It is presented on the income statements and annual reports of a company. You can calculate net sales or net revenue by:

Net revenue =

Gross sales – sales returns

Net fixed assets

Plant, property, and equipment count in the category of net fixed assets. It is preferable to count the average fixed assets at the end of a financial year, but many calculate the net fixed assets. It is also present in the annual report of a company. Net fixed assets help companies to maintain the entrance and exit of their fixed assets.

You can calculate net fixed assets by:

Net fixed assets = Gross fixed asset – accumulated depreciation.

How is the fixed asset turnover ratio calculated?

The fixed asset turnover ratio is different from fixed asset turnover. The fixed asset turnover ratio is calculated with the company's total assets, while fixed asset turnover can be acquired with a firm or company's net fixed or long-term assets.

The asset turnover ratio helps understand your investments and fixed and current assets utilization. With this ratio, you can compare the level of your company's capital investment to your comparable businesses or manufactured industry averages.

The equation for calculating the asset turnover ratio is:

Asset turnover ratio = Net revenue / total assets

You can calculate total assets as follows:

Total assets = Total fixed assets + total current & other assets (including cash & bank balances) – accumulated depreciation & amortization

What is a good fixed asset turnover ratio?

A high fixed asset turnover indicates that a company is utilizing its fixed assets adequately and efficiently. If your fixed assets turnover ratio is high, the return on your capital would also be high. You can attract and convince various investors and lenders to invest in your company with your high return on the capital, as it is a positive initiative for them.

The fixed asset turnover ratio is not the same for all companies, as many factors may affect it. Factors like capital-intensive industry, type, demand, and supply of product, age and operational time of fixed assets, and others significantly impact the asset turnover ratio.

The management team of a company holds critical decisions regarding assets and investments. The decisions should be mutual, made after analyzing these factors deeply and based on essential financial indicators.

Is higher fixed asset turnover better?

With a lower ratio, you should know that your investments in fixed assets are more, but your sales performance is low. Your company's management should pay attention to it; otherwise, you may face future losses. You may have low asset utilization and high depreciation cost, which is not a good indication.

On the other hand, a higher fixed asset turnover ratio is better for many businesses. It tells that your company utilizes fixed assets well to generate revenue, but the investments are low. It can be due to the non-availability of funds, enough depreciation of machines, and the substantial reduction of a net block.

Final words

Every company holds some fixed assets that indicate its profit and loss after each accounting year. Understanding the performance to invest in fixed assets and generate sales from them can be possible by calculating the fixed asset ratio.

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