Fixed Asset Turnover Ratio Explained With Examples

The asset turnover ratio measures the value of a company’s sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue. A business that has net sales of $10,000,000 and total assets of $5,000,000 has a total asset turnover ratio of 2.0. 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.

• 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.
• Furthermore, other indicators that gauge the profitability and risk of the company are also necessary to determine the performance of the business.
• Therefore, another factor should be incorporated to ensure that the ratio fairly represents the performance.

It is likewise useful in analyzing a company’s growth to see if they are augmenting sales in proportion to their asset bases. This is particularly true for manufacturing companies with large machines and facilities. A low ratio may have a negative perception if the company recently made significant large fixed asset purchases for modernization.

Fixed Asset Turnover Ratio Example

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.

The FAT ratio measures a company’s efficiency to use fixed assets for generating sales. The asset turnover ratio, also known as the total asset turnover ratio, measures the efficiency with which a company uses its assets to produce sales. formula of fixed asset turnover ratio The asset turnover ratio formula is equal to net sales divided by the total or average assets of a company. A company with a high asset turnover ratio operates more efficiently as compared to competitors with a lower ratio.

• It is likewise useful in analyzing a company’s growth to see if they are augmenting sales in proportion to their asset bases.
• By doing this calculation, we can determine the amount of income made by a company per dollar invested in net fixed assets.
• This improves the company’s asset turnover ratio in the short term as revenue (the numerator) increases as the company’s assets (the denominator) decrease.
• She is on a mission to stamp out unawareness and uncomplicate boring personal finance blogs to sparkle.

For better analysis and assessment, the Fixed Assets that are not related to Sales or Sales that are not related to Fixed Assets should be excluded. It is unfair for the division to be assessed if part of the Fixed Assets is included in the list while the sale related to those assets is not included. Keep in mind that a high or low ratio doesn’t always have a direct correlation with performance.

How to Calculate Fixed Asset Turnover Ratio?

Naturally, the higher the ratio, the more efficient and profitable a business is. 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. Net sales refer to the amount of gross revenue minus returns, allowances, and discounts.

Asset Turnover Ratio Definition

It could also indicate that the company has begun to outsource its activities after selling off its equipment. Outsourcing would retain the same level of sales while lowering the investment in equipment. You can use the fixed asset turnover ratio calculator below to quickly calculate a business efficiency in using fixed assets to generate revenue by entering the required numbers. A low asset turnover ratio compared to the industry implies that either the company has invested too much capital into fixed assets, or its sales are not enough to meet fixed asset turnover industry standards. A low fixed asset turnover also indicates that the company needs to increase its sales to get this ratio closer to the industry average.

On the other hand, company XYZ – a competitor of ABC in the same sector – had total revenue of $8 billion at the end of the same fiscal year. Its total assets were $1 billion at the beginning of the year and $2 billion at the end. The asset turnover ratio is expressed as a rational number that may be a whole number or may include a decimal. By dividing the number of days in the year by the asset turnover ratio, an investor can determine how many days it takes for the company to convert all of its assets into revenue.

Example of How to Use the Asset Turnover Ratio

For instance, if the total turnover of a company is 1.0x, that would mean the company’s net sales are equivalent to the average total assets in the period. In other words, this company is generating $1.00 of sales for each dollar invested into all assets. FAT ratio is important because it measures the efficiency of a company’s use of fixed assets. This allows them to see which companies are using their fixed assets efficiently.

Manufacturing companies often favor the fixed asset turnover ratio over the asset turnover ratio because they want to get the best sense in how their capital investments are performing. Companies with fewer fixed assets such as a retailer may be less interested in the FAT compared to how other assets such as inventory are being utilized. Investors who are looking for investment opportunities in an industry with capital-intensive businesses may find FAT useful in evaluating and measuring the return on money invested. This evaluation helps them make critical decisions on whether or not to continue investing, and it also determines how well a particular business is being run.

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. After that year, the company’s revenue grows by 10%, with the growth rate then stepping down by 2% per year. Suppose an industrials company generated $120 million in net revenue in the past year, with $40 million in PP&E. Depreciation is a measurement of a depreciable asset’s wearing out, consumption, or other loss of value due to usage, effluxion of time, or obsolescence due to technological and market developments. As it operates as a high technology company, most devices are the main operation, and the works are just a tiny part.

The formula to calculate the fixed asset turnover ratio compares a company’s net revenue to the average balance of fixed assets. A higher fixed asset turnover ratio indicates that a company has effectively used investments in fixed assets to generate sales. Depreciation is the allocation of the cost of a fixed asset, which is spread out—or expensed—each year throughout the asset’s useful life.

The total asset turnover ratio compares the sales of a company to its asset base. The ratio measures the ability of an organization to efficiently produce sales, and is typically used by third parties to evaluate the operations of a business. Ideally, a company with a high total asset turnover ratio can operate with fewer assets than a less efficient competitor, and so requires less debt and equity to operate. The asset turnover ratio measures how effectively a company uses its assets to generate revenue or sales.

Publicly-facing industries including 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. Though real estate transactions may result in high-profit margins, the industry-wide asset turnover ratio is low. After calculating the fixed asset turnover ratio, the efficiency metric can be compared across historical periods to assess trends. 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.