How to Find the Fixed Asset Turnover Ratio

The fixed asset turnover ratio provides insight into how effectively a business uses its long-term assets, measuring how much revenue it generates from its property, plant, and equipment. This article explains how to identify the necessary financial figures, perform the calculation, and interpret the results.

What the Fixed Asset Turnover Ratio Measures

The fixed asset turnover ratio indicates a company’s operational efficiency. It quantifies how effectively a business converts its investment in fixed assets, such as buildings, machinery, and land, into sales revenue. A higher ratio generally suggests a company maximizes the use of its physical assets to generate sales, implying efficient capital expenditure management.

Conversely, a lower ratio might indicate underutilization of these assets, perhaps due to idle capacity, or that the business operates within a highly capital-intensive industry. This metric provides insight into how well a company’s management is leveraging its fixed asset base to drive revenue growth and overall operational performance.

Locating Required Financial Information

To calculate the fixed asset turnover ratio, you need two primary financial figures: net sales and fixed assets. Net sales, sometimes referred to as revenue, are typically found on a company’s income statement. This figure represents the total sales generated during a specific accounting period, after accounting for returns, allowances, and discounts.

The other component, fixed assets (Property, Plant, and Equipment (PP&E), Net), is located on the balance sheet. This line item reflects the book value of a company’s long-term tangible assets, reduced by accumulated depreciation.

For a more accurate representation of asset utilization over a period, it is standard practice to use average fixed assets. This involves taking the sum of the fixed asset balance at the beginning of the period and the end of the period, then dividing by two. Using an average helps smooth out any significant asset acquisitions or disposals that might occur during the reporting period, providing a more stable base for comparison.

Performing the Calculation

Once you have identified the necessary figures, calculating the fixed asset turnover ratio is straightforward. The formula is simply Net Sales divided by Average Fixed Assets. This calculation directly translates the sales generated into a multiple of the average fixed assets utilized.

For example, if a company reported net sales of $10,000,000 for the year, and its average fixed assets for that same period were $2,000,000, you would divide $10,000,000 by $2,000,000. This calculation would yield a fixed asset turnover ratio of 5.0. This result signifies that for every dollar invested in fixed assets, the company generated five dollars in sales revenue. The higher the resulting number, the more sales are generated per dollar of fixed assets.

Understanding Your Results

Interpreting the fixed asset turnover ratio requires context. A high ratio generally indicates that a company is efficiently utilizing its fixed assets to generate sales. Such a result might suggest that the business operates with less capital intensity or has effectively managed its asset base. Conversely, a low ratio could signal inefficient asset usage, overinvestment in property, plant, and equipment, or simply reflect a capital-intensive industry. For instance, a manufacturing company typically has a lower ratio than a software company due to the inherent differences in their business models.

To gain meaningful insights, compare a company’s fixed asset turnover ratio to its historical performance and to the ratios of competitors within the same industry. Industry benchmarks are essential because what is considered efficient in one sector might be inefficient in another. Factors such as the age of a company’s assets and the depreciation methods used can also influence the ratio. Older, fully depreciated assets will artificially inflate the ratio, as their book value is lower, making sales appear more efficient relative to the asset base.