The fixed asset turnover ratio is a financial metric that measures how efficiently a company uses its fixed assets to generate sales.
Primary Implication
A high Fixed Asset Turnover Ratio means the assets of the business are being utilized efficiently in generating sales. The value of a high ratio is changed if the company sold assets and is now doing more outsourcing.
A low ratio indicates that the company isn’t using its assets to their fullest extent. It may be over-invested in fixed assets if product demand and machine investments are out of alignment.
Overview
The Fixed Asset Turnover Ratio is an Efficiency Ratio that measures the Return on Investment in property, plant, and equipment. This ratio is obtained by comparing net sales with fixed assets and by calculating how efficiently a company is producing sales with its machines and equipment.
A high or low Fixed Asset Turnover Ratio does not always have a direct correlation with performance. If a company uses an accelerated depreciation method, like double-declining depreciation, the book value of their equipment will be artificially low—which makes their performance look much better than it is.
Similarly, a company that is not reinvesting in new equipment will see this metric continue to rise, year over year, because the accumulated depreciation balance keeps increasing, thus reducing the denominator.
The formula for calculating the Fixed Asset Turnover Ratio
Net Sales / (Fixed Assets – Accumulated Depreciation)
A ratio of 5 means that the company generates five times more sales than the net book value of its assets.
Higher is Better: means assets are being utilized efficiently in generating sales unless the company has sold equipment and is now doing more outsourcing.
Lower is Worse: indicates that the company isn’t using its assets to their fullest extent. It may be over-invested in fixed assets if product demand and machine investments are out of alignment.
