Fixed Asset Turnover Formula


A company can still have high costs that will make it unprofitable even when its operations are efficient. The use of assets in the generation of revenue is usually more than a year–that is long term. This is essential in the prudent reporting of the net revenue for the entity in the period. Moreover, a fixed/non-current asset also can be defined as an asset not directly sold to a firm’s consumers/end-users. Its non-current assets would be the oven used to bake bread, motor vehicles used to transport deliveries, cash registers used to handle cash payments, etc.


The improvement in efficiency indicates that no asset is lying idle and are put to best use. Even if entities have same investment in fixed assets, those using straight-line method of depreciation will tend to have better FAT ratio than those that use reducing balance method for depreciation calculation. Higher or increasing fixed asset turnover indicates that entity is generating more revenue per dollar invested in fixed assets of the entity. In simple words higher FAT is desirable but it does not necessarily mean favourable in every situation. A sudden drop in the fixed asset turnover ratio is sometimes due to the obsolesce of fixed assets. Since fixed assets are used for a longer period of time, they are likely to devalue with use.

If a company utilizes an ERP, it may use the fixed asset module available from the ERP instead of a third-party fixed asset software. Current assets refer to company-owned items that will be converted into cash within the year. Long-term assets are the remaining items that can’t be replaced with cash within one year.

What is an asset turnover ratio?

The ratio may look distorted if a company has sold off some of its assets. On the other side, selling assets to prepare for declining growth will result in an artificial inflation of the ratio. Artificial deflation can be caused by a company buying large amounts of assets, such as new technologies, in anticipation of growth.

Creditors are concerned with the ratio because it tells them whether a new piece of equipment will generate enough money to repay the loan used to acquire it. Investors care about this ratio because it can give them a rough idea of their ROI. Total asset turnover measures the efficiency of a company’s use of all of its assets. As with many other financial ratios and metrics, there’s no “golden number” that you should be striving for, especially taking into account the variance between industries, company sizes, and so on. While the asset turnover ratio is a beneficial tool for determining the efficiency of a company’s asset use, it does not provide all the detail that would be helpful for a full stock analysis. Free Cash FlowThe cash flow to the firm or equity after paying off all debts and commitments is referred to as free cash flow .

Every industry needs to be measured in a different way, depending on how it generates revenue. For some, it’s heavy on fixed assets like PP&E, while others depend mostly on current assets like cash, receivables, or inventory. An example of fixed asset turnover is when a company sells its fixed assets over the course of a year and makes a profit on the sale. The company then takes that profit and divides it by the total cost of the fixed assets that were sold to get the fixed asset turnover ratio. This ratio measures how efficiently a company is using its fixed assets to generate sales and profits. There are a few things to keep in mind when calculating the fixed asset turnover ratio.

Net PPL is always used by subtracting the depreciation from gross PPL. Therefore, the equipment’s book value will be low if the firm uses an accelerated depreciation method, such as double declining depreciation. While a higher ratio implies better efficiency, this number alone can’t be the sole indicator of a company’s profitability. This is different from returns that require the buyer to return the product for full reimbursement. To put it simply, net sales are the ‘real’ amount of gross revenue that the company receives. For this reason, we cannot isolate this ratio alone to draw conclusions.

gross fixed assets

Total fixed assets are all the long-term physical assets a company owns and uses to generate sales. These assets are not intended to sell but rather used to generate revenue over an extended period of time. A good company will have a high fixed asset turnover ratio in comparison to its competitors in the industry. This is so because a higher fixed asset turnover means the use of fixed assets to their optimum. The fixed asset focuses on analyzing the effectiveness of a company in utilizing its fixed asset or PP&E, which is a non-current asset.

However, to gain the best how much does 1 bitcoin cost to buy? bitcoin guidesing of how a company is using its resources, its asset turnover ratio must be compared to other similar companies in its industry. A high turn over indicates that assets are being utilized efficiently and large amount of sales are generated using a small amount of assets. It could also mean that the company has sold off its equipment and started to outsource its operations. Outsourcing would maintain the same amount of sales and decrease the investment in equipment at the same time.

Fixed Asset Turnover Ratio (FAT)

A company could have a high FAT ratio because it sells its assets quickly. Still, if the assets are not generating enough revenue, the company is not performing well. Another serious concern with FAT ratio is that fluctuations in revenue are hardly in perfect correlation. Entity can have a certain pattern for revenue but not necessarily a certain pattern for acquisition and disposal of fixed asset. FAT ratio tend to increase even without the increase in revenue if entity is disposing off its assets.

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The concept of the fixed asset turnover ratio is most useful to an outside observer, who wants to know how well a business is employing its assets to generate sales. A corporate insider has access to more detailed information about the usage of specific fixed assets, and so would be less inclined to employ this ratio. Finally, the fixed asset turnover ratio calculation is done by dividing the net sales by the net fixed assets, as shown below. Investors and creditors use this formula to understand how well the company is utilizing their equipment to generate sales. This concept is important to investors because they want to be able to measure an approximate return on their investment.

  • And, if competitors make similar investments, the market faces excess supply.
  • These include white papers, government data, original reporting, and interviews with industry experts.
  • A high FAT ratio shows that a company is decently managing its fixed assets to generate sales.
  • Matching concept is simply matching the expenses of a period against the revenues of the same period.
  • In this case, the fixed asset turnover ratio for the year would be 9.51.

If the ratio is high, the company needs to invest more in capital assets to support its sales. Otherwise, future sales will not be optimal when market demand remains high due to insufficient capacity. You will learn how to use its formula to assess a company’s operating efficiency. Take stock of the company’s net sales, which may be seen as a line item on the income statement. But it is important to compare companies within the same industry in order to see which company is more efficient.

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In addition to historical comparisons, comparing the ratio to competing companies or industry averages is essential to provide deeper insight. A ratio that is declining can indicate that the company is potentially over-investing in property, plant or equipment or simply producing a product that isn’t selling. So take all Fixed Assets less any accumulated depreciation they may have generated and then divide the result into net sales. This ratio is also important in industries such as manufacturing where a company can typically spend a lot of money on the purchase of equipment.

Investors, creditors, and analysts use it to measure a companies operating performance. A fixed asset is an asset that a business has bought in order to use as part of its production process when it comes to making and distributing the goods and services the business offers. As we discussed, for too high a ratio, too low a ratio may indicate that the company has recently made a heavy investment. And that investment could be in acquiring new assets, expansion of capacities is underway, or the company has embarked upon diversification. And all these new capacities or assets are yet to become operational. The ratio helps in calculating the return of assets in the form of sales.

Fixed Asset Turnover Calculation

The fixed asset turnover ratio is similar to the tangible asset ratio, which does not include the net cost of intangible assets in the denominator. 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 general, the higher the fixed asset turnover ratio, the better, as the company is implied to be generating more revenue per dollar of long-term assets owned. The asset turnover ratio uses total assets instead of focusing only on fixed assets as done in the FAT ratio.

Hence, there will be a difference in the fixed-asset turnover ratio of both the companies. A high fixed-asset turnover ratio does not assure high profits or high cash inflows for the company. Several reasons explain why the fixed asset turnover ratio declined.First, the company may invest too much inproperty, plant, and equipment (PP&E).

A high FAT ratio shows that a company is decently managing its fixed assets to generate sales. However, FAT alone can’t be the sole indicator of company profitability. If a business is in an industry where it’s not necessary to have large physical assets investments, FAT may give the wrong impression. This is the case since the amount of the fixed asset is not that big in the first place. That’s why it’s vital to use other indicators to have a more comprehensive view. The company age can also affect variations in fixed asset turnover ratios.