Fixed Asset Turnover Ratio Formula What Is It, Examples

This metric analyzes a company’s ability to generate sales through fixed assets, also known as property, plant, and equipment (PP&E). Because of this, it’s crucial for analysts and investors to compare a company’s most current ratio to both its historical ratios as well as ratio values from peers and/or the industry average. Publicly-facing industries including fixed asset turnover ratio formula retail and restaurants rely heavily on converting assets to inventory, then converting inventory to sales. Other sectors like real estate often take long periods of time to convert inventory into revenue.

1. Additionally, management may outsource production to reduce reliance on assets and improve its FAT ratio, while still struggling to maintain stable cash flows and other business fundamentals.
2. A company may still be unprofitable with the efficient use of fixed assets due to other reasons, such as competition and high variable costs.
3. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career.
4. Conversely, if a company has a low asset turnover ratio, it means it is not efficiently using its assets to create revenue.
5. Companies with a higher FAT ratio are often more efficient than companies with a low FAT ratio.

Fixed vs. Total Assets

Though real estate transactions may result in high profit margins, the industry-wide asset turnover ratio is low. The fixed asset turnover ratio formula divides a company’s net sales by the value of its average fixed assets. 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 Useful is the Fixed Asset Turnover Ratio to Investors?

The ratio compares the dollar amount of sales or revenues to the company’s total assets to measure the efficiency of the company’s operations. To calculate the ratio, divide net sales or revenues by average total assets. Sometimes, investors and analysts are more interested in measuring how quickly a company turns its fixed assets or current assets into sales. In these cases, the analyst can use specific ratios, such as the fixed-asset turnover ratio or the working capital ratio to calculate the efficiency of these asset classes. The working capital ratio measures how well a company uses its financing from working capital to generate sales or revenue.

Hence, it is often used as a proxy for how efficiently a company has invested in long-term assets. CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.

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It compares the dollar amount of sales to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets. One variation on this metric considers only a company’s fixed assets (the FAT ratio) instead of total assets. The asset turnover ratio measures how effectively a company uses its assets to generate revenues or sales.

This allows them to see which companies are using their fixed assets efficiently. The higher the asset turnover ratio, the better the company is performing, since higher ratios imply that the company is generating more revenue per dollar of assets. There is no exact ratio or range to determine whether or not a company is efficient at generating revenue on such assets. 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. A company will gain the most insight when the ratio is compared over time to see trends. Companies with strong ratios may review all aspects that generate solid profits or healthy cash flow.

Since using the gross equipment values would be misleading, we always use the net asset value that’s reported on the balance sheet by subtracting the accumulated depreciation from the gross. Companies with fewer assets on their balance sheet (e.g., software companies) tend to have higher ratios than companies with business models that require significant spending on assets. But it is important to compare companies within the same industry in order to see which company is more efficient. 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.

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As fixed assets are usually a large portion of a company’s investments, this metric is useful to assess the ability of a company’s management. This metric is also used to analyze companies that invest heavily in PP&E or long-term assets, such as the manufacturing industry. The fixed asset turnover (FAT) is one of the efficiency ratios that can help you assess a company’s operational efficiency.

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. Thus, a sustainable balance must be struck between being efficient while also spending enough to be at the forefront of any new industry shifts.