A high ratio suggests efficient asset utilization, indicating that ABC Corporation effectively generates revenue relative to its asset base. A low fixed asset turnover ratio shows that a company isn’t very efficient at using its assets to generate revenue. Fixed Asset Turnover Ratio is a great way to benchmark one company against another or against an industry average. In fact, what’s considered a “good” or “bad” ratio is very dependent on the industry. When you calculate this ratio, you’ll see how many times you generate your fixed asset value in revenue each year.

This allows them to see which companies are using their fixed assets efficiently. Total fixed assets are all the long-term physical assets a company owns and uses to generate sales. These assets are not intended to sell but rather used to generate revenue over an extended period of time. Also, a high fixed asset turnover does not necessarily mean that a company is profitable.

This ratio shows the efficiency with which a company uses its assets to generate income. Total asset turnover measures the efficiency of a company’s use of all of its assets. This would be good because it means the company uses fixed asset bases more efficiently than its competitors.

Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets. One variation on this metric considers only a company’s fixed assets (the FAT ratio) instead of total assets. The asset turnover ratio measures a company’s ability to generate sales revenue relative to its assets. It quantifies how efficiently a company utilizes its assets to generate sales and indicates how effectively management deploys its resources. A high ratio suggests efficient asset utilization, while a low ratio may show underutilization or inefficiencies. Fixed asset turnover (FAT) ratio financial metric measures the efficiency of a company’s use of fixed assets.

Optimize Asset Utilization

Companies with cyclical sales may have low ratios in slow periods, so the ratio should be analyzed over several periods. Additionally, management may outsource production to reduce reliance on assets and improve its FAT ratio, while still struggling to maintain stable cash flows and other business fundamentals. As with all financial ratios, a closer look is necessary to understand the company-specific factors that can impact the ratio. Such ratios should be viewed as indicators of internal or competitive advantages (e.g., management asset management) rather than being interpreted at face value without further inquiry.

1. Net sales represent the total revenue generated from the sale of goods and services, excluding discounts, returns, and allowances.
2. Companies with fewer assets on their balance sheet (e.g., software companies) tend to have higher ratios than companies with business models that require significant spending on assets.
3. Every company holds some fixed assets that indicate its profit and loss after each accounting year.
4. Capital intensives are corporations that demand big investments in property and equipment to operate effectively.
5. Another possibility is that management is utilizing the existing assets continually, perhaps across all three shifts, in order to maximize their usage.
6. Conversely, a low FAT ratio could be a sign that the company is not using its assets efficiently.

For example, retail or service sector companies have relatively small asset bases combined with high sales volume. Meanwhile, firms in sectors like utilities or manufacturing tend to have large asset bases, which translates to lower asset turnover. It would not make sense to compare the asset turnover ratios for Walmart and AT&T, since they operate in different industries. Comparing the relative asset turnover ratios for AT&T with Verizon may provide a better estimate of which company is using assets more efficiently in that sector. The asset turnover ratio measures the value of a company’s sales or revenues relative to the value of its assets. The asset turnover ratio indicates the efficiency with which a company is using its assets to generate revenue.

Just-in-time (JIT) inventory management, for instance, is a system whereby a firm receives inputs as close as possible to when they are needed. So, if a car assembly plant needs to install airbags, it does not keep a stock of airbags on its shelves but receives them as those cars come onto the assembly line. As with many other financial ratios and metrics, there’s no “golden number” that you should be striving for, especially taking into account the variance between industries, company sizes, and so on.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. For the final step in listing out our assumptions, the company has a PP&E balance of $85m in Year 0, which is expected to increase by $5m each period and reach $110m by the end of the forecast period.

1. The ideal ratio varies by industry, so benchmarking against peers provides the most meaningful comparison for assessing performance.
2. It quantifies how efficiently a company utilizes its assets to generate sales and indicates how effectively management deploys its resources.
3. This means that lenders and investors often rely on financial ratios and financial statement analysis.
4. Asset turnover varies greatly from sector to sector, so it is not possible to derive a general value.
5. Analyzing variations in fixed assets turnover ratios across industries can identify outliers and industry-specific trends influencing asset turnover.
6. Generally speaking, the higher the ratio, the better, because a high ratio indicates the business has less money tied up in fixed assets for each unit of currency of sales revenue.

Investors should review the trend in the asset turnover ratio over time to determine whether asset usage is improving or deteriorating. The fixed asset turnover ratio is similar to the tangible asset ratio, which does not include the net cost of intangible assets in the denominator. Every company holds some fixed assets that indicate its profit and loss after each accounting year. Understanding the performance to invest in fixed assets and generate sales from them can be possible by calculating the fixed asset ratio. Companies can evaluate the efficiency of their management formula of fixed assets turnover ratio for investing in fixed assets.

Final Thoughts: The Value of the Fixed Asset Turnover Ratio

The fixed assets turnover ratio serves as a key performance indicator for evaluating a company’s operational efficiency and asset utilization. By comparing the fixed assets turnover ratio with industry benchmarks and historical data, stakeholders can evaluate a company’s competitive position and performance relative to its peers. Changes in the fixed assets turnover ratio over time can signal shifts in business operations, investment strategies, or changes in market conditions. A higher fixed asset turnover ratio generally means that the company’s management is using its PP&E more effectively. As fixed assets are usually a large portion of a company’s investments, this metric is useful to assess the ability of a company’s management. This metric is also used to analyze companies that invest heavily in PP&E or long-term assets, such as the manufacturing industry.

What Is the Main Downside to the Fixed Asset Turnover Ratio?

A higher fixed assets turnover ratio indicates more efficient utilization of fixed assets to generate revenue, reflecting positively on the company’s operational performance. Also, analyzing trends in the fixed assets turnover ratio over time helps assess the effectiveness of asset management strategies and identify areas for improvement. Companies with higher fixed assets turnover ratios relative to competitors may demonstrate superior asset utilization and operational efficiency. Conversely, companies with lower fixed assets turnover ratios may need to investigate their asset management practices and identify opportunities for optimization.

Is Your Fixed Asset Turnover Ratio Healthy?

It means the company is efficiently using its assets like property, equipment and inventory to produce sales. A high and increasing asset turnover ratio is generally favorable, as it suggests the company is effectively managing assets to maximize revenue. The asset turnover ratio offers valuable insights into a company’s operational efficiency in leveraging assets like inventory, property, and equipment to grow sales.

A higher fixed assets turnover ratio suggests that a company effectively utilizes its fixed assets to generate revenue. Conversely, a lower ratio may indicate underutilization or inefficient management of fixed assets. From this result, we can conclude that the textile company is generating about seven dollars for every dollar invested in net fixed assets.

Discover the key financial, operational, and strategic traits that make a company an ideal Leveraged Buyout (LBO) candidate in this comprehensive guide. To calculate the Fixed Assets Turnover Ratio, a user needs to navigate to the Net Fixed Assets section by expanding the balance sheet of a stock found in the Fundamentals section, as highlighted in the image. For Year 1, we’ll divide Year 1 sales ($300m) by the average between the Year 0 and Year 1 PP&E balances ($85m and $90m), which comes out to a ratio of 3.4x. Suppose a company generated $250 million in net sales, which is anticipated to increase by $50m each year. To reiterate from earlier, the average turnover ratio varies significantly across different sectors, so it makes the most sense for only ratios of companies in the same or comparable sectors to be benchmarked.