# 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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