Fixed Asset Turnover Ratio Analysis

3.1 Fixed-Asset Turnover Ratio – An overview

The ratio of net sales to fixed assets is known as fixed-asset turnover ratio. It is calculated by analysts to determine the operating performance of a company. Basically this ratio accounts for the net sales a company can generate based on its fixed asset investments. They are -property, plant and equipment (PP&E), net of depreciation. A higher fixed-asset turnover ratio is preferred for it is a sign of optimum utilization of investments made in fixed assets and this also reflects the efficiency of human resources a company has.

When a company begins to make heavy investments, it is advisable for all the investors to monitor the Fixed-Asset Turnover ratio in subsequent years. This is necessary to observe the efficiency of

While calculating the ratio, one must ensure that returns and refunds are backed out of total sales to make a precise measurement of the company’s assets' ability to market the sales.

One of the simple ways to calculate average total assets is to add the initial and final total asset balances together and then divide them by two. This very method is based on a two-year balance sheet. A more in-depth, weighted average calculation can be used, but it is not essential.

Let’s take a simple example to understand how the fixed asset ratio is calculated –

Suppose, there’s a tech startup company that develops utility software for mobiles and tablets, it goes by the name of say, Indie tech. Indie needs new investor who could sponsor them; the co-founders have a meeting with an angel investor for the same purpose. Out of all the things investor is interested in, he’ll like to know how well Indie utilizes their assets to generate revenue; he wishes to see their financial statement.

Their financial statement reported the following -

Beginning Assets – INR 50,000

Ending Assets – INR 100,000

Net Sales – INR