**What is fixed asset turnover
ratio ?**

Fixed asset turnover ratio is an
activity ratio that is used to measure a firm’s ability to generate sales from
the fixed assets it has employed. It indicates how judiciously and efficiently a
firm has been able to use its fixed assets to generate sales. It gives
investors a fair idea of the return on investment, based on the sales generated
for a given level of investment in Fixed assets.

It is calculated by dividing the
Net sales by the Net investment in fixed assets.

**What is the formula for Fixed
asset turnover?**

The formula for calculating the
Fixed asset turnover is

= Net Sales / Net Fixed assets

Where Net Fixed assets = Gross
Fixed assets – Accumulate depreciation

Net sales = Gross sales – Sales
returns

**How do you calculate fixed asset
ratio ?**

** Example :** Cash Rich. Co. has provided the following
information for the year 2021.

Gross sales of $ 500,000 ;
Sales Returns = $ 50,000 ; Gross fixed assets = $ 250,000 ;

Accumulated Depreciation = $
150,000 ; Calculate the Fixed assets Turnover ratio .

** Solution :** The formula for calculating the
Fixed Asset Turnover is

Fixed Asset Turnover = Net Sales / Net Fixed Assets

= ( Gross sales – Sales Returns ) / ( Gross fixed assets – Accumulated
Depreciation )

Applying the Information from the question in the formula we have the fixed asset turnover

ratio as

= ( $ 500,000 – $ 50,000 ) / ( $ 250,000 – $ 150,000 )

= $ 450,000 / $ 100,000 = 4.5

Thus the Fixed Asset Turnover ratio = 4.5 times

**What does a high fixed asset
turnover ratio indicate ?**

A high fixed assets turnover ratio implies that, a company as has been able to use its fixed

assets efficiently to generate a large amount of sales. The revenue per dollar of fixed asset

investment is high.

Sometimes, a company may outsource certain revenue generating operations that require fixed

asset investment. This will result in a decreased investment in fixed assets. As the investment

in fixed investment decreases the fixed asset turnover ratio increases at a given level of sales.

In case of a company that is service oriented and the products it sells are in the form of a

group of services, it may not require a heavy investment in fixed assets. It will have generally

have a high fixed asset turnover ratio.

**What does a low fixed asset
turnover ratio indicate ?**

A company with a low fixed assets turnover ratio usually has a high amount invested in the

fixed assets. When a company has not been able to generate sales that justify a large scale

investment in fixed assets, it may result in a low fixed asset turnover
ratio.

A low fixed asset turnover ratio is mostly seen in companies that are capital intensive and are

engaged in manufacturing.

** **

**What
does a fixed asset turnover ratio of 4 times represent?**

A fixed asset turnover ratio of 4 times means that the company is able to generate 4 times the

sales revenue for each unit of dollar invested in fixed assets.