Fixed Asset Turnover Ratio
How a Fixed Asset Turnover Ratio Is Calculated
A fixed asset turnover ratio is an activity ratio that determines the success of a company based on how it's using its fixed assets to make money. It adds revenue earned per each dollar invested in fixed assets.
Why Is the Fixed Asset Ratio Important?
Essentially, the fixed asset turnover ratio measures the company's effectiveness in generating sales from its investments in plant, property, and equipment. It is especially important for a manufacturing firm that uses a lot of plant and equipment in its operations to calculate this ratio.
How Is the Fixed Asset Turnover Ratio Calculated?
- Net Sales/Net Plant and Equipment (Net Fixed Assets) = X Times.
- The denominator in the equation should be net of accumulated depreciation.
Interpretation: If the fixed asset turnover ratio is low as compared to the industry or past years of data for the firm, it means that sales are low or the investment in plant and equipment is too high. It may not be a serious problem if the company has just made an investment in a fixed asset to modernize, for example.
While a higher fixed asset turnover ratio is generally better, if the fixed asset turnover ratio is too high, then the business firm is likely operating over capacity and needs to either increase its asset base (plant, property, equipment) to support its sales or reduce its capacity.
Why Are Asset Management Ratios Important?
Asset management ratios are the key to analyzing how effectively your business is managing its assets to produce sales. Asset management ratios are also called turnover ratios or efficiency ratios. If you have too much invested in your company's assets, your operating capital will be too high. If you don't have enough invested in assets, you will lose sales, and that will hurt your profitability, free cash flow, and stock price.
You, as the owner of your business, have the task of determining the right amount to invest in each of your asset accounts. You do that by comparing your firm to other companies in your industry and see how much they have invested in asset accounts. You also keep track of how much you have invested in your asset accounts from year to year and see what works.
What Is Return on Assets?
The return on assets ratio is an important profitability ratio because it measures the efficiency with which the company is managing its investment in assets and using them to generate profit. It measures the amount of profit earned relative to the firm's level of investment in total assets. The return on assets ratio is related to the asset management category of financial ratios.
The calculation for the return on assets ratio is: Net Income/Total Assets = _____%. Net Income is taken from the income statement, and total assets are taken from the balance sheet. The higher the percentage, the better, because that means the company is doing a good job using its assets to generate sales.