Fixed Asset Turnover Ratio

What is Fixed Asset Turnover? Definition

Definition: The fixed asset turnover ratio is the efficiency ratio which is used to measure the return of the company on its investment in plant, equipment, and machines. In other words, it measures how efficiently a company can produce sales from its machines and equipment.

This formula used by the investors and creditors to analyze the efficiency of the company to produce sales from its machines and equipment. This is a very helpful ratio for investors. Because from this investors can measure the approximate return on their investment. In the large industries, companies purchase the high cost of machinery. The creditor wants those companies which make enough revenue from new machines and pay back loans they used to purchase them.

Management does not use this ratio typically because it gives information to internal users like sales figure and equipment purchase.

Now we learn how to calculate the fixed asset turnover ratio

Formula

Fixed asset turnover ratio formula can be calculated by dividing the net sales by the difference of the fixed assets and accumulated depreciation that is

Fixed asset turnover = net sales/(fixed asset – Accumulated depreciation)

From the balance, we can get the value for the calculation of fixed asset turn over by putting the values in the above formula.

Analysis

What is a Good Fixed Asset Turnover?

If the fixed asset turnover ratio is high it means that assets are used efficiently for a large number of sales. Whereas a low turnover ratio means that assets are not used efficiently to produce large sales.

There are many factors due to which the turnover ratio is low e.g company produce those things which customer does not want to buy, or there may be a manufacturing problem due to which have a low ratio.

High turnover or low turnover ratio have not the direct correlation with the performance of the company because there may be the outside effect which can change the value of this ratio.

Now we take the example calculation of fixed asset turnover ratio as

Example

Joe has the car restoration store in which he restores the car in the former position. For the expansion of the operation of the store, Joe applies for the loan. Joe’s sales at the end of the year are \$250,000 using the equipment he paid \$100,000 for. 50,000 dollars is the accumulated depreciation on the equipment. Now by putting these value turnover ratio calculated as

5= 250,000/(100,000 – 50,000)

From the above result, we know that joe generates 5 times greater sales as compared to the net value of the assets. Its result can be compared with other company in the industries to find efficiency as compared to others.

For more Financial Ratio Check:

Equity multiplier

Equity ratio

Expense ratio