Fixed asset turnover ratio

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.

 

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