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Fixed Asset Turnover Ratio

Description: The fixed asset turnover ratio is the ratio of net sales to net fixed assets (also known as property, plant, and equipment). A high ratio indicates that a company is doing an effective job of generating sales with a relatively small amount of fixed assets. Conversely, if the ratio is declining over time, the company has either overinvested in fixed assets or it needs to issue new products to revive its sales. Another possible effect is for a company to make a large investment in fixed assets, with a time delay of several months to a year before the new assets start generating revenues.

Formula: Subtract accumulated depreciation from gross fixed assets, and divide into net annual sales. It may be necessary to obtain an average fixed asset figure, if the amount varies significantly over time. Do not include intangible assets in the denominator, since it can skew the results. The formula is:

Net annual sales
Gross fixed asset - Accumulated depreciation

Example: ABC Company has gross fixed assets of $5,000,000 and accumulated depreciation of $2,000,000. Sales over the last 12 months totaled $9,000,000. The calculation of ABC's fixed asset turnover ratio is:

$9,000,000 Net sales
$5,000,000 Gross fixed assets - $2,000,000 Accumulated depreciation

= 3.0 Turnover per year

Cautions: The fixed asset turnover ratio is most useful in "heavy industry," such as automobile manufacturing, where a large capital investment is required in order to do business. In other industries, such as software development, the fixed asset investment is so meager that the ratio is not of much use.

A potential problem with this ratio may arise if a company uses accelerated depreciation, such as the double declining balance method, since this artificially reduces the amount of net fixed assets in the denominator of the calculation, and makes turnover appear higher than it really should be.

Finally, ongoing depreciation will inevitably reduce the amount of the denominator, so the turnover ratio will rise over time, unless the company is investing an equivalent amount in new fixed assets to replace older ones.

Similar Ratios

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.

Similar Ratios

Operating assets ratio
Return on operating assets