Fixed Asset Turnover Overview, Formula, Ratio and Examples

This ratio assesses a company’s capacity to generate net sales from its fixed-asset investments, specifically property, plant, and equipment (PP&E). The fixed asset turnover ratio measures a company’s efficiency and evaluates it as a return on its investment in fixed assets such as property, plants, and equipment. In other words, it assesses the ability of a company to generate net sales from its machines and equipment efficiently. The fixed asset turnover ratio shows the relationship between a company’s annual net sales and the net amount of its fixed assets.

What are the causes of a low fixed asset turnover ratio?

A low ratio suggests that the company is producing less amount of revenue per rupee invested in fixed assets, such as property, plant, and equipment. This implies that assets are being underutilised and that there is an excess of production capacity. In addition to suggesting inert or inefficient assets, a low ratio could also be indicative of a strategic decision to invest in capacity for future growth. To find the fixed assets turnover ratio for a particular stock, you need to look up the company’s financial statements, specifically the income statement and balance sheet.

Operating Assumptions

Companies with a higher FAT ratio are generally considered to be more efficient than companies with low FAT ratio. In such cases, comparing these companies on the basis of this ratio may give a misleading picture. Therefore, it’s possible that one company is following an asset-light model while the other is adopting an asset-intensive model, though they are operating in the same industry. In addition, you should be aware when using the company’s consolidated balance sheet in case the company that you’re evaluating is operating in different sectors or niches.

• During the year, the company booked net sales of $260,174 million, while its net fixed assets at the start and end of 2019 stood at $41,304 million and $37,378 million, respectively.
• This ratio is often analyzed alongside leverage and profitability ratios.
• The formula to calculate the fixed asset turnover ratio compares a company’s net revenue to the average balance of fixed assets.
• There is no benchmark for the best fit sales to fixed asset ratio, and you have to compare the ratio of the same company over past couple of years to get better evaluation results.
• It is likewise useful in analyzing a company’s growth to see if they are augmenting sales in proportion to their asset bases.

Its net fixed assets’ beginning balance was $1M, while the year-end balance amounts to $1.1M. The ratio can be used as a benchmark and compared with the other peer companies to clarify the performance of the business operations and its place in the industry as a whole. This will give more insight into the operational efficiency level and its asset utilization capacity. Net fixed assets are divided by long-term funds to calculate fixed assets ratio. From the balance sheet of Unreal corporation calculate its fixed assets ratio; Assume that during its recent year a corporation had net sales of $18 million.

Example of Fixed Asset Turnover Ratio

This shows that for 1 currency unit of the long-term fund, the company has 0.83 corresponding units of fixed assets; furthermore, the ideal ratio is said to be around 0.67. The fixed Assets ratio is a type of solvency ratio (long-term solvency) which is found by dividing the total fixed assets (net) of a company by its long-term funds. It shows the amount of fixed assets being financed by each unit of long-term funds. The asset turnover ratio uses total assets instead of focusing only on fixed assets.

This ratio first gained prominence in the early 1900s during America’s industrial boom, when manufacturers relied heavily on factories, machinery, and other capital-intensive assets to drive productivity. Companies with a higher FAT ratio are often more efficient than companies with a low FAT ratio. By using a wide array of ratios, you can be sure to have a much clearer picture, and therefore a more educated decision can be made. As such, there needs to be a thorough financial statement analysis to determine true company performance.

This allows them to see which companies are using their fixed assets efficiently. A company with a higher FAT ratio may be able to generate more sales with the same amount of fixed assets. A lower ratio, on the other hand, suggests that the company is not using its fixed assets efficiently and sales are declining. But it could also mean that the company has discarded most of its fixed assets due to slow down in business, or it has outsourced its operations.

This evaluation helps them make critical decisions about whether to continue investing, and it also determines how well a particular business is being managed. It is likewise useful in analyzing a company’s growth to see if they are augmenting sales in proportion to their asset bases. Fixed assets are tangible long-term or non-current assets used in the course of business to aid in generating revenue. These include real properties, such as land and buildings, machinery and equipment, furniture and fixtures, and vehicles. Ideally, fixed assets should be sourced from long-term funds & current assets should be from short-term funds/current liabilities.

Sales to Fixed Assets Ratio

• This ratio first gained prominence in the early 1900s during America’s industrial boom, when manufacturers relied heavily on factories, machinery, and other capital-intensive assets to drive productivity.
• This ratio compares net sales displayed on the income statement to fixed assets on the balance sheet.
• These assets are not intended to sell but rather used to generate revenue over an extended period of time.
• The fixed asset turnover ratio  compares net sales to the average fixed assets on the balance sheet, with higher ratios indicating greater productivity from existing assets.
• Companies might outsource to improve their FAT ratio, but still struggle with cash flow and other basics.

The FAT ratio, calculated yearly, shows how efficiently a company uses its assets to generate revenue. It’s important to consider other parts of financial statements when reviewing current assets. For instance, intangible assets, asset capacity, return on assets, and fixed asset ratio formula tangible asset ratio.

This can only be discovered if a comparison is made between a company’s most recent ratio and previous periods or ratios of other similar businesses or industry standards. This is especially true for manufacturing businesses that utilize big machines and facilities. Although not all low ratios are bad, if the company just made some new large purchases of fixed assets for modernization, the low FAT may have a negative connotation. 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. 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. This ratio is often analyzed alongside leverage and profitability ratios. Fixed Asset Turnover (FAT) is an efficiency ratio that indicates how well or efficiently a business uses fixed assets to generate sales. This ratio divides net sales by net fixed assets, calculated over an annual period.

However, it is also possible that the business is operating in such an industry where product development may take some time to reflect into sales. Fixed assets and accumulated depreciation amount can be found on the company’s balance sheet. Despite the reduction in Capex, the company’s revenue is growing – higher revenue is generated on lower levels of Capex purchases. The calculated fixed turnover ratios from Year 1 to Year 5 are as follows. Unlike the initial equipment sale, the revenue from recurring component purchases and services provided to existing customers requires less spending on long-term assets.

Fixed Asset Turnover Ratio Formula Calculator

A higher FAT ratio indicates more efficient utilization of fixed assets to generate sales. The fixed asset turnover ratio does not incorporate any company expenses. Therefore, the ratio fails to tell analysts whether a company is profitable.

This will give you a complete picture of the company’s level of asset turnover. Despite these limitations, the fixed major asset turnover ratio is still a useful tool for investors. Company A’s FAT ratio is 2 ($1,000/$500), while Company B’s ratio is 0.5 ($500/$1,000). This means that Company A uses fixed assets efficiently compared to Company B.

In addition, there may be differences in the cash flow between when net sales are collected and when fixed assets are acquired. The asset turnover ratio is usually smaller than the fixed asset turnover ratio because it uses a larger denominator. This is because there is a bigger gap between sales and total assets than between sales and just fixed assets. FAT shows how well a company generates sales from its investments in property, plant, and equipment (PP&E). A higher turnover ratio means the company is using its fixed assets well to generate sales.