What is the 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
Formula for the Fixed Asset Turnover Ratio
- 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
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 240,000 / 50,000 = 4.8. For every 1 invested in Fixed Assets 4.80 is generated in revenue.
Now suppose for the same investment in fixed assets the business is able to increase the sales to 300,000, by for example utilizing the same fixed assets for a longer period of time throughout the day, then the asset turnover ratio will increase to 300,000 / 50,000 = 6.0. For every 1 invested in fixed assets 6.00 is generated in revenue.
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 asset turnover 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, so it is important to monitor any changes in the fixed asset turnover ratio particularly if your business is considering any major investment in fixed assets.
A low fixed asset turnover ratio can imply an excess manufacturing capacity if for example fixed assets represent investment in manufacturing facilities. If the fixed asset ratio is too high it can imply the business is under investing in fixed assets.
Useful tips for using the Fixed Asset Turnover Ratio
- The fixed asset turnover ratio will vary from industry to industry, so it is important to make comparisons to similar businesses in your sector. A manufacturing business, for example, would be more capital intensive and therefore all things being equal, have a lower fixed asset turnover ratio than for example a retail business.
- It is possible to improve the fixed asset turnover 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
- 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.
About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years and has built financial models for all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a degree from Loughborough University.