Fixed-Asset Turnover Ratio

Posted in Finance, Accounting and Economics Terms, Total Reads: 491
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Definition: Fixed-Asset Turnover Ratio

It is a financial efficiency ratio of sales ,from profit and loss account, to fixed assets. We take fixed assets as they are normally the largest component in the total assets value.


Fixed- asset turnover = Net Sales/ Average Net Fixed Assets


Average net fixed Assets= (Net Assets at the beginning of FY + Net Assets at the end of FY)/ 2


It measures company's ability to use its assets to generate sales, how well is it using fixed assets investment like plant, equipments and property less depreciation to generate sales. The higher the ratio, the better because it means less money is invested in assets per unit of money earned as a sales revenue hence the company is using is assets effectively.


Change in this ratio over years gives an indication of changing efficiency and productivity of the firm. Like most other ratio, this ratio is also compared to the industry average. The ratio is compared within the industry . It should be kept in mind that with age, the book value of assets keep decreasing.


For eg a fixed asset ratio of 0.7 means that for each dollar invested in assets, a sale of 70 cents is generated. Nothing could be comprehended from the ratio alone. If we know that the industry average is 0.6, we know that the firm is efficient while if we also know that last year the ratio for this firm was 0.8 and we conclude that though the firm maintains higher efficiency than the industry but its efficiency has fallen over the last year.

Majorly used in manufacturing industries as investment in fixed assets like plant and equipment is quite high.

 

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