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
= ( $ 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.