Fixed Asset Turnover
Fixed asset turnover ratio compares the sales revenue a company to its fixed assets. This ratio tells us how effectively and efficiently a company is using its fixed assets to generate revenues. This ratio indicates the productivity of fixed assets in generating revenues. If a company has a high fixed asset turnover ratio, it shows that the company is efficient at managing its fixed assets. Fixed assets are important because they usually represent the largest component of total assets.
There is no standard guideline about the best level of asset turnover ratio. Therefore, it is important to compare the asset turnover ratio over the years for the same company. This comparison will tell whether the company’s performance is improving or deteriorating over the years. It is also important to compare the asset turnover ratio of other companies in the same industry. This comparison will indicate whether the company is performing better or worse than others.
An increasing trend in fixed assets turnover ratio is desirable because it means that the company has less money tied up in fixed assets for each unit of sales. A declining trend in fixed asset turnover may mean that the company is over investing in the property, plant and equipment.
This ratio is usually used in capital-intensive industries where major purchases are for fixed assets. This ratio should be used in subsequent years to see how effective the investment in fixed assets has been.
The formula for calculation of fixed asset turnover ratio is given below
Fixed Asset Turnover Ratio = Sales Revenue / Total Fixed Assets
The fixed assets usually include property, plant and equipment. The value of goodwill, long-term deferred tax and other fixed assets that do not belong to property, plant and equipment is usually subtracted from the total fixed assets to present a more meaningful fixed asset turnover ratio.