Fixed Asset Turnover Ratio

The fixed asset turnover ratio shows the revenue generated by the investment in fixed assets by your business. It is a measure of the efficiency with which the business uses its fixed asset resources. It is calculated by dividing revenue by fixed assets

Fixed Asset Turnover Formula

• Fixed assets is given in the Balance Sheet. It is the net book value of fixed assets given by gross fixed assets less accumulated depreciation. It is normal to average the opening and closing values of Net Fixed Assets for use in the ratio.
• Revenue is found in the income statement. It may be called sales or turnover.

The Fixed Asset Turnover Ratio Calculation in Practice

To illustrate suppose for example fixed assets are 50,000. If the revenue generated from these fixed assets is 240,000, then the asset turnover ratio is calculated as follows.

Fixed asset turnover ratio = Revenue / Fixed assets
Fixed asset turnover ratio = 240,000 / 50,000 = 4.8

In this case the ratio shows that for every 1 invested in fixed assets 4.80 is generated in revenue.

In contrast suppose for the same investment in fixed assets the business is able to increase it’s revenue to 300,000. This could be achieved for example by utilizing the same fixed assets for a longer period of time throughout the day. In this case the calculation of the asset turnover ratio is as follows.

Fixed asset turnover ratio = Revenue / Fixed assets
Fixed asset turnover ratio = 300,000 / 50,000 = 6.0

As can be seen the ratio has increased by utilizing the assets more efficiently. For every 1 invested in fixed assets 6.00 is generated in revenue.

Additionally our free excel fixed asset turnover calculator is available to help with the calculation of the ratio.

What does the Fixed Asset Turnover Ratio show?

The fixed asset turnover ratio shows how efficiently the resources of the business are being used to generate revenue. A low ratio could indicate inefficiencies in the Fixed Assets themselves or in the management team operating them.

All fixed assets of the business should yield their maximum return for the owners. It is important to monitor any changes in the ratio particularly if your business is considering any major investment in fixed assets.

Suppose for example fixed assets represent investment in manufacturing facilities. In this case a low ratio might imply an excess manufacturing capacity. In contrast if the fixed asset ratio is too high it can imply the business is under investing in fixed assets.

Useful tips for using the Ratio

• Firstly the fixed asset turnover ratio will vary from industry to industry. It is important to make comparisons to similar businesses in your sector. A manufacturing business might be more capital intensive and therefore have a lower ratio than for example a retail business.
• Secondly it is possible to improve the ratio by for example working shifts. If you own a manufacturing facility and keep it operating throughout the day and night, then manufacturing output and hopefully sales will increase for the same investment in fixed assets
• Finally there is no correct value for the asset turnover ratio. The important thing is to ensure that the trend is upwards to show improving efficiency.

Conclusion

Overall, the fixed asset turnover ratio is a useful metric for assessing a business’s ability to generate revenue from its investment in fixed assets. A high turnover ratio indicates that a business is effectively utilizing its fixed assets to generate revenue which can lead to higher profits and shareholder value. In contrast a low turnover ratio may indicate that the business is not utilizing its fixed assets efficiently, resulting in lower revenue and profitability. This may be a sign that the business is investing too much in fixed assets, which can lead to higher maintenance and depreciation costs.