What Is the Fixed Asset Turnover Ratio?

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fixed asset turnover

The fixed asset turnover ratio is basically a measuring tool used by the companies to analyze or judge that how well the company’s assets are functioning to produce or bring in the revenue or sales for the company. 

Note: Here, fixed assets represent property, plant, and equipment, etc used by the company in producing the finished product. 

Moreover, the Investors and creditors also use the Fixed Asset Turnover Ratio to know the sales of the company. Investors measure the return on their investments which are invested in the company, whereas the creditors make sure that the company is in a position to pay off its debts. 

Fixed Asset Turnover Ratio Definition:

The Fixed Asset Turnover Ratio defines the ability of a company to produce sales or revenue or profits from the assets of the company and in all compare the net sales of the company with the total sales of the company, in order to know the financial position of the company. 

What are Fixed Assets?

The tangible or the non-current assets used for long term period used in the business for generating revenue are categorized as fixed assets. Thus, they include the following or the following can be categorized among fixed assets:

  • land and buildings,
  • machinery and equipment, 
  • furniture and fixtures, and
  • vehicles.

Note: But they (fixed assets) should be used for the business purpose. 

Fixed Asset Turnover Ratio Formula

The formula used for calculating the Fixed Asset Turnover Ratio is stated as follows:

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

​Where in the above FAT formula:

  • the Net Sales = Gross sales – returns, and the allowances
  • the Average Fixed Assets = NABB − Ending Balance / 2
  • ​the NABB = the Net fixed assets commencement balance​
  • And the net fixed assets formula = ((Total of the Fixed Assets + Total of the Current Assets) – (Total of the Current Liabilities + Total of the Extended Period Liabilities))

The higher fixed asset turnover ratio shows that the company is using its assets in the desired and utmost way in order to generate sales for the company.

The Fixed Asset Turnover Ratio and the Asset Turnover Ratio Difference

 While calculating the Asset Turnover Ratio we make use of the total assets, whereas in the calculation of the Fixed Asset Turnover Ratio, only fixed assets are used. 

 The formula for the same (Fixed Asset Turnover Ratio) applies as: 

  • Fixed Asset Turnover Ratio or FAT = the Net Sales / Average Fixed Assets 

And the formula for the Asset Turnover Ratio is as:

  • Fixed asset turnover ratio = Net annual sales ÷ (Gross fixed assets – Accumulated depreciation)

OR

  • Asset turnover ratio = total sales / total assets

Example of the Fixed Asset Turnover Ratio

Example 1: A Company ABC ltd has annual sales or net sales of $45,00,000 and the net fixed assets of $500,000 for the year. Calculate the Fixed Asset Turnover Ratio intended for ABC Ltd. Company.

Solution: Given to us the following data:

  • annual sales or net sales = $45,00,000
  • net fixed assets = $500,000

Applying the FAT formula, as 

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $45,00,000 / $500,000

Fixed Asset Turnover Ratio or FAT = 9.

So, the Fixed Asset Turnover Ratio intended for the ABC Company had net sales of $45,00,000 and the net fixed assets of $500,000 are 9.

Example 2: Three companies as X, Y, and Z have their annual sales or net sales as well as the net fixed assets as follows:

Y Z
net sales $500,000 $5,00,000 $5,00,000
net fixed assets $ 10,00000 $12,00,000 $14,00,000

Calculate the Fixed Asset Turnover Ratio meant for the X, Y, and Z Companies.

Solution:

Calculation of FAT for the Company X:

Given to us:

  • net sales = $500,000
  • net fixed assets = $ 10,00000

Using the FAT formula as,

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $500,000 / $ 10,00000

FAT Ratio = 0.50

Calculation of FAT for the Company Y:

Given to us:

  • net sales = $500,000
  • net fixed assets =$12,00,000

Using the FAT formula as,

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT =$ 500,000 / $ 12,00,000

FAT Ratio = 0.42

Calculation of FAT for the Company Z:

Given to us:

  • net sales = $ 500,000
  • net fixed assets =$14,00,000

Using the FAT formula as,

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT =$ 500,000 / $ 14,00000

FAT Ratio = 0.36

Y Z
net sales $ 500,000 $ 5,00,000 $ 5,00,000
net fixed assets $ 10,00000 $12,00,000 $14,00,000
net fixed assets ratio 0.50 0.42 0.36

Here, we see that the higher the net fixed assets, the lower is the Fixed Asset Turnover Ratio or FAT of the company. 

Example 3: Three companies as A, B, and C have their annual sales or net sales as well as the net fixed assets as follows:

A B C
net sales $500,000 $,800,000 $11,00,000
net fixed assets $ 10,00000 $ 10,00000 $ 10,00000

Calculate the Fixed Asset Turnover Ratio intended for the A, B, and C Companies.

Solution: 

Calculation of FAT for the Company A:

Given to us:

  • net sales = $500,000
  • net fixed assets = $ 10,00000

Using the FAT formula as,

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $ 500,000 / $ 10,00000

FAT Ratio = 0.50

Calculation of FAT for the Company B:

Given to us:

  • net sales = $ 800,000
  • net fixed assets = $ 10,00000

Using the FAT formula as,

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $ 800,000 / $ 10,00000

FAT Ratio = 0.80

Calculation of FAT for the Company C:

Given to us:

  • net sales = $ 1100,000
  • net fixed assets = $ 10,00000

Using the FAT formula as,

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $ 11,00,000 / $ 10,00000

FAT Ratio = 1.10

A B C
net sales $500,000 $,800,000 $11,00,000
net fixed assets $ 10,00000 $ 10,00000 $ 10,00000
Fixed Asset Turnover Ratio 0.50 0.80 1.10

Here, we have noticed higher net sales lead to a higher ​ Fixed Asset Turnover Ratio or FAT ratio. And When the net sales are greater than the net fixed assets, then the Fixed Asset Turnover Ratio or FAT ratio will be higher than 1. 

Fixed Asset Turnover Ratio in Excel:

Example 1: A Company ABC ltd has annual sales or net sales of $45,00,000 and the net fixed assets of $500,000 for the year. Calculate the Fixed Asset Turnover Ratio intended for ABC Ltd. Company.

Solution: Given to us the following data:

  • annual sales or net sales = $ 45,00,000
  • net fixed assets = $500,000

Now, Calculating the Fixed Asset Turnover Ratio using excel.

A B
1 net sales $ 45,00,000
2 net fixed assets $500,000
3 Fixed Asset Turnover Ratio = B1 / B2

Applying the FAT formula, as 

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $45,00,000 / $500,000 (= B1 / B2)

Fixed Asset Turnover Ratio or FAT = 9.

The net result of the Fixed Asset Turnover Ratio shown in excel sheet will be as follows:

A B
1 net sales $ 45,00,000
2 net fixed assets $500,000
3 Fixed Asset Turnover Ratio 9

So, the Fixed Asset Turnover Ratio intended for the ABC Company had net sales of $45,00,000 and the net fixed assets of $500,000 is 9.

Example 2: Three companies as: A, B, and C have their annual sales or net sales as well as the net fixed assets as follows:

A Company B Company C Company
net sales $500,000 $,800,000 $11,00,000
net fixed assets $ 10,00000 $ 10,00000 $ 10,00000

Calculate the Fixed Asset Turnover Ratio intended for the A, B, and C Companies.

Solution: 

Now, Calculating the Fixed Asset Turnover Ratio of A, B, and C Companies using excel.

A B C D
A Company B Company C Company
1 net sales $500,000 $,800,000 $11,00,000
2 net fixed assets $ 10,00000 $ 10,00000 $ 10,00000
3 Fixed Asset Turnover Ratio = B1 / B2 = C1 / C2 = D1 / D2

Calculation of FAT for Company A:

Using the FAT formula as,

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $ 500,000 / $ 10,00000

FAT Ratio = 0.50

Calculation of FAT for Company B:

Using the FAT formula as,

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $ 800,000 / $ 10,00000

FAT Ratio = 0.80

Calculation of FAT for Company C:

Using the FAT formula as

Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets 

Fixed Asset Turnover Ratio or FAT = $ 11,00,000 / $ 10,00000

FAT Ratio = 1.10

The net result of Fixed Asset Turnover Ratio shown in excel sheet will be as follows:

A B C D
A Company B Company C Company
1 net sales $500,000 $,800,000 $11,00,000
2 net fixed assets $ 10,00000 $ 10,00000 $ 10,00000
3 Fixed Asset Turnover Ratio 0.50 0.80 1.10

So, the Fixed Asset Turnover Ratio intended for A, B, and C Companies are 0.50, 0.80, and 1.10 respectively.

What does Fixed Asset Turnover Ratio indicate?

As the fixed asset ratio can be high as well as low. Thus, both of these indicates:

  • High Fixed Asset Turnover Ratio:

A High Fixed Asset Turnover Ratio indicates competence or the productivity of the business to manage the fixed assets of the business. So, a high Fixed Asset Turnover Ratio is preferred by most of the business as it brings profitability to the business by providing higher returns in the business. 

Though, different assets utilization ratios exist for different companies by which the efficiency of each company or business in its terms are calculated. 

  • Low Fixed Asset Turnover Ratio:

A low Fixed Asset Turnover Ratio indicates inadequacy or wastefulness of the professional to manage the fixed assets of the business. So, a high Fixed Asset Turnover Ratio is not preferred by most of the business as it shows that the amount invested in the immovable assets of the business is more than the return they are producing. Moreover, a low or decreased ratio indicated that a company or business is investing more in the fixed assets than the desired. 

Also Read:- What is YOY (Year Over Year) How to Calculate It?

How can you Improve the Fixed Asset Turnover Ratio?

There exist certain ways in which you can improve your Fixed asset turnover ratio some of which are as follows:

  1. Revenue to be increased: you need to focus on the revenue of the company or the business in order to attain profits, which will eventually increase the Fixed asset turnover ratio. 
  2. Discharge the non-usable assets: the old, as well as the non-usable assets, should be discharged off from the company as they will hamper the production of the business and eventually bring impact on the sales of the company. 
  3. Lease the assets: You can also give your assets on lease which will bring revenue to the company or the business. 
  4. Improve your inventory management: you need to keep a track of all your inventory and make sure that the working of inventory is working at its pace, as it hampers the sales of the product to the ultimate consumer. 

How Fixed Asset Turnover ratio is useful for the Investors?

Investors are the ones who are willing to invest in your company or the business. Thus, they check the efficiency and the sales as well as the profit of the company before investing in the company. Thus, the Fixed Asset Turnover ratio helps the investors in knowing the position as well as the efficiency of the company in the market by which the investor decides or makes the decision whether to invest or not to invest in the company or the business. 

Conclusion:

Companies need to keep a check on their Fixed Asset Turnover Ratio which helps to measure the productivity as well as the revenue generated from the business. Whereas, A high fixed asset turnover ratio indicates efficient management of the assets in the business, and the low fixed asset turnover ratio indicates that the business is not managing their fixed assets efficiently and the investments in fixed assets are high than the required. 

FAQ

A virtuous fixed asset turnover ratio is the one that is able to generate high return or high sales with the available fixed assets of the company. Thus, a high fixed asset ratio is considered as a decent fixed asset turnover ratio bringing in profitability to the business as well as showing up efficiency in the business.

An ideal fixed asset turnover ratio should be high for the company as it depicts efficiency of the business to manage the fixed assets of the business. And thus, preferred by most of the business owners as well as the investors and the creditors.

The ideal fixed asset turnover ratio is the one that is bringing profitability to the business. Though, it may vary from company to company.

If the sales of the company are decreasing or the company is not able to use its fixed assets in an efficient way to generate profit for the business, then the fixed asset turnover ratio decreases. It basically leads to or shows the inefficiency of the company or the business.

If the company or the business is performing better, than it will eventually lead to an increase in the fixed asset turnover ratio of the company. And will also result in generating higher revenue for the company.

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