Fixed Asset Turnover Ratio: Definition, Formula & Calculation

The net fixed assets include the amount of property, plant, and equipment, less the accumulated depreciation. Generally, a higher fixed asset ratio implies more effective utilization of investments in fixed assets to generate revenue. The fixed asset turnover ratio is useful in determining whether a company uses its fixed assets to drive net sales efficiently. It is calculated by dividing net sales by the average balance of fixed assets of a period. FAT measures a company’s ability to generate net sales from its fixed-asset investments, namely property, plant, and equipment (PP&E). A higher fixed asset turnover ratio indicates that a company has effectively used investments in fixed assets to generate sales.

Indications of High / Low Fixed Asset Turnover Ratio

From this result, we can conclude that the textile company is generating about seven dollars for every dollar invested in net fixed assets. From a general view, some may say that this company is quite successful in taking advantage of its assets to gain profit. However, a proper analyst will first compare this result with other companies in the same industry to get a proper opinion. Furthermore, other indicators that gauge the profitability and risk of the company are also necessary to determine the performance of the business. A fixed asset turnover ratio is an activity ratio that determines the success of a company based on how it’s using its fixed assets to make money.

As you can see, Jeff generates five times more sales than the net book value of his assets. The bank should compare this metric with other companies similar to Jeff’s in his industry. A 5x metric might be good for the architecture industry, but it might be horrible for the automotive industry that is dependent on heavy equipment. Fixed assets vary significantly from one company to another and from one industry to another, so it is relevant to compare ratios of similar types of businesses. Therefore, by comparing the two sides — revenue and an asset metric — each “turnover” ratio measures the relationship between the two and how they trend over time. The FAT ratio can give us a sense of how efficient a company is at using its invested assets to generate income.

Investors and creditors gain insight into how a company manages and utilizes its assets to generate products and sales. As an investor, you want to monitor the usage of both fixed assets and current assets since you’re investing your money. When a company starts making significant investments, all investors should monitor the Fixed-Asset Turnover ratio in the following years. Manufacturing industries that make substantial purchases for PP&E use this ratio as a metric to scale up output.

• However, it is important to remember that the FAT ratio is just one financial metric.
• In theory, the underlying objective of a well-managed company is to derive as much revenue as possible using the least amount of resources, which often establishes an economic moat.
• Each activity ratio consists of revenue in the numerator and then a measure of a working capital metric in the denominator.
• Additionally, there are limitations to the calculations of the ratio, such as the calculation of fixed assets that can be difficult to interpret.
• When considering investing in a company, it is important to note that the FAT ratio should not perform in isolation, but rather as one part of a larger analysis.
• As a general rule of thumb, the higher the turnover ratio, the better — since it implies the company can generate more revenue with fewer assets.

Fixed Asset Turnover Ratio Calculator

While it indicates efficient use of fixed assets to generate sales, it says nothing about the company’s ability to generate solid profits or maintain healthy cash flows. Fixed Asset Turnover is a crucial metric for understanding how well a company uses its fixed assets to drive revenue. It provides valuable insights for investors, analysts, and management, helping to gauge operational efficiency and inform strategic decisions. The Fixed Assets Turnover Ratio is a key metric that analysts, investors, and lenders look at. Any choice made by management should be based on a comprehensive examination of all of these variables, as well as other financial indicators. It shows that fixed asset management is more efficient, resulting in higher returns on asset investments.

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• This ratio divides net sales by net fixed assets, calculated over an annual period.
• Fixed asset turnover (FAT) ratio financial metric measures the efficiency of a company’s use of fixed assets.
• The FAT ratio is calculated by dividing the net sales of a company by the average balance of its net fixed assets over a specific period, usually a year.
• However, this does not necessarily mean the company is performing well overall.
• This is because the fixed asset turnover is the ratio of the revenue and the average fixed asset.
• However, it’s important to consider the industry context when analyzing the FAT ratio.

There is no precise % or Range that can be used to assess if a firm is effective at producing revenue from such assets. This can only be determined by comparing a company’s current ratio to earlier periods, as well as ratios of other similar firms or Industry norms. Fixed assets differ greatly from one firm to the next and from one sector to the next, thus comparing ratios of comparable types of organisations is important. Based on the given figures, the fixed asset turnover ratio for the year is 9.51, meaning that for every dollar invested in fixed assets, a return of almost ten dollars is earned. The average net fixed asset figure is calculated by adding the beginning and ending balances, and then dividing that number by 2.

How to Calculate Activity Ratio?

Annually calculating the fixed asset turnover ratio reveals the proficiency of a company, particularly its financial management team, in generating income from the company’s fixed assets. Essentially, investments in fixed assets constitute the largest component of the company’s total assets. Thus, it helps to assess how well the company’s long term investments are able to bring adequate returns for the business. The primary advantages of using the fixed asset turnover ratio include the ability to assess the efficiency of your company’s fixed assets and identify areas for improvement. However, it is important to recognize that this ratio does not provide a complete picture of your company’s financial health and should be used in conjunction with other metrics and insights.

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Therefore, Y Co. generates a sales revenue of $3.33 for each dollar invested in fixed assets compared to X Co., which produces a sales revenue of $3.19 for each dollar invested in fixed assets. Therefore, based on the above comparison, we can say that Y Co. is a bit more efficient in utilizing its fixed assets. In a heavy sector industry, such as automotive manufacturing, where substantial Capital expenditure is necessary to do business, the fixed asset turnover ratio is particularly helpful.

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It also makes conceptual sense that there is a wider gap between the amount of sales and total assets compared to the amount of sales and a subset of assets. Industry standards for the fixed asset turnover ratio can vary widely depending on the nature of the business, the industry, and the company’s competitive position. As a rule of thumb, however, a ratio of one or higher is generally considered acceptable, while ratios fixed asset turnover ratio below one may signal inefficiencies in the use of fixed assets. The asset turnover ratio is calculated after dividing net sales by average total assets.

This exclusion is intentional to focus on fixed assets, but it means that the ratio does not provide a complete picture of all the resources a company uses to generate revenue. Manufacturing companies often favor the FAT ratio over the asset turnover ratio to determine how well capital investments perform. Companies with fewer fixed assets such as retailers may be less interested in the FAT compared to how other assets such as inventory are utilized. The asset turnover ratio uses total assets instead of focusing only on fixed assets. Using total assets reflects management’s decisions on all capital expenditures and other assets. Total fixed assets are all the long-term physical assets a company owns and uses to generate sales.