FIXED ASSET TURNOVER RATIO

When it comes lớn improving or predicting a company’s performance, the leadership team has a lot of unique insight. They have access to all sorts of financial reports and data not shared with the outside world. External stakeholders and investors, on the other hand, often have only the financial statements to go by (audited or not, depending on the company).

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This means that lenders và investors often rely on financial ratios & financial statement analysis. This allows them lớn perform a valuation based only on publicly available information provided by the company. Fixed asset turnover ratio is one of the ratios used lớn measure company performance. It’s especially helpful in capital-intensive industries like the manufacturing industry.

Calculating the Fixed Asset Turnover ratio is fairly simple. First, subtract accumulated depreciation from your total assets on the balance sheet khổng lồ arrive at the book value of the company’s assets. Next, divide net sales (from the income statement) by that net asset value. Since many assets are bought & sold during the year, investors and lenders often showroom the beginning balance và ending balance of fixed assets & divide by 2 khổng lồ arrive at average net fixed assets.

What Does Fixed Asset Turnover Tell You?

Fixed Asset Turnover is an efficiency ratio. It tells you how well a company is using its fixed assets lớn generate income, also known as a return on assets. Using the example of a manufacturing company, this ratio tells you how efficiently the company is using every dollar it invests in machinery & equipment to lớn generate revenue.

This ratio is especially helpful for lenders providing money for new equipment (and wanting lớn know they can be repaid) or investors who want khổng lồ estimate future sales revenue & cash flow based on asset purchases. For instance, if a manufacturing company is inefficient at generating revenue from one of its facilities, it’s unlikely that lenders và investors will feel comfortable financing expansion for a new facility.

Is a Higher or Lower Asset Turnover Ratio Better?

When you calculate this ratio, you’ll see how many times you generate your fixed asset value in revenue each year. For instance, if you have $1m in average fixed assets and have $2.5m in net sales for the year, your fixed asset turnover ratio will be 2.5.

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A low fixed asset turnover ratio shows that a company isn’t very efficient at using its assets to lớn generate revenue. A high ratio, on the other hand, shows greater efficiency. Fixed Asset Turnover Ratio is a great way to benchmark one company against another or against an industry average. In fact, what’s considered a “good” or “bad” ratio is very dependent on the industry.

Some industries don’t really lend themselves to this ratio at all and should be measured in other ways. For instance, the inventory turnover ratio may be much more helpful in retail, where inventory is a major asset.

Every industry needs to be measured in a different way, depending on how it generates revenue. For some, it’s heavy on fixed assets lượt thích PP&E, while others depend mostly on current assets lượt thích cash, receivables, or inventory. The different efficiency ratios track how the company uses assets to lớn generate revenue, và vary mostly by changing the denominator in the formula to lớn fit the asset base of the company (fixed assets, current assets, working capital, etc.).

Keep in mind that the fixed asset turnover is just part of the picture. It shows how efficiently you generate revenue from assets, but that on its own isn’t enough. The gross sales generated can’t tell you everything you need khổng lồ know. You’ll also want lớn look at profitability ratios like profit margin to lớn see how much of that revenue makes it the bottom line net income. 

Conclusion

Fixed asset turnover ratio is helpful for measuring how efficiently a company uses its fixed assets lớn generate revenue without being inherently capital intensive. The higher the ratio, the more efficient. To lớn be truly insightful, though, one needs khổng lồ measure the trend of the ratio over time or compare it against a benchmark for a specific industry.


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As CEO và Co-Founder, Mike leads obatambeienwasirherbal.com’s corporate vision, strategy và execution. Prior to founding obatambeienwasirherbal.com, he managed the accounting team at Cornerstone OnDemand, a SaaS company in Los Angeles. He began his career at Ernst & Young in Los Angeles where he performed public company audits, opening balance sheet audits, cash to GAAP restatements, compilation reviews, international reporting, merger and acquisition audits and SOX compliance testing. He holds a Bachelor’s degree in Accounting from Syracuse University.