Denise Elizabeth P
Senior Financial Editor & Contributor

The Fixed Asset Turnover Ratio is a formula used by analysts, investors, and creditors to measure a companies operating performance.

A higher fixed asset turnover ratio means that the company is using its investments in fixed assets effectively to drive up and generate sales.

In other words, this ratio is used to measure a companies return on their investment in fixed assets – which include property, plant and equipment.

A fixed asset is an asset that a business has bought in order to use as part of its production process when it comes to making and distributing the goods and services the business offers.

Some examples of fixed assets include:

•       Land
•       Building
•       Machinery
•       Office furniture
•       Company vehicles such as company trucks and cars

The reason this ratio is important for key players in an organization is because it provides a measurement for return on investment.

Investors use it to determine if there is a good chance that they will get a return on their investment and creditors use it to determine whether or not the company will be able to generate enough revenue to pay back their loan.

## Fixed Asset Turnover Ratio Formula

The fixed assets turnover ratio is calculated when net sales is divided by total property, plant, and equipment (net of accumulated depreciation):

To understand the different elements of this ratio, let’s define what each item entails:

• Net Sales = Gross sales minus returns and allowances
• Fixed Assets = This is the average fixed assets and it is calculated using the following formula:

Average Fixed Assets = Net fixed assets’ beginning balance (NABB) + Ending Balance / 2

• Accumulated Depreciation = this amount is subtracted from the gross fixed assets to give you the net asset value on the balance sheet

Another simple way to think of the fixed asset turnover ratio is:

Fixed Asset Turnover Ratio = Nets Sales / Net Fixed Assets

## Fixed Asset Turnover Ratio Interpretation

### Low Fixed Asset Ratio

When a business has a low fixed asset ratio, it means that they have a high amount of investment in fixed assets and are perhaps under performing when it comes to sales.

This may be more common in manufacturing firms who use large machinery and facilities to produce a product.

But, this doesn’t mean that all low ratios are bad.

For example, a company may have just made a few new large fixed asset purchases and it needs time to use those fixed assets to generate income.

If this is the case, investors and creditors will look at previous periods to see if there are any trends in the companies fixed asset turnover ratio.

If the fixed asset turnover ratio has been declining over time, it could mean that the company is over-investing in fixed assets.

### High Fixed Asset Ratio

As mentioned before, a higher fixed asset turnover ratio means that the company is using its investments in fixed assets effectively to drive up and generate sales.

This is the preferred scenario for most businesses and indicates they are more efficient in managing their fixed assets.

While there isn’t an “ideal” or average fixed asset turnover ratio, a companies ratio is often compared to industry standards to determine if the company is doing about the same or better than other companies in the same industry.

## Example Fixed Asset Turnover Ratio

To put this formula into practice, let’s go over a few examples to help us understand how it works.

Example #1:

ABC Company’s balance sheet shows they have net sales of \$10 million and fixed assets of \$2 million.

Investors are interested in ABC Company and want to know what their fixed asset turnover ratio is in comparison to the industry average fixed asset turnover of 3 times.

ABC Company Fixed Asset Turnover Ratio = \$10 million / \$2 million = 5

What the ratio is telling us is that ABC Company has a fixed asset turnover ratio of 5 times and that their turnover is faster than the industry average of 3.

This means that they are efficient at using their PP&E (property, plant, and equipment) to generate sales and turn a profit.

This is a great sign for the investors because it means that the company is doing a good job at managing their fixed assets.

They are not over or under leveraged.

Example # 2:

The first example was really simple, but let’s look at an example that finds and calculates the average fixed assets for two different companies and compares the results.

We will be using the following data to calculate the fixed asset turnover ratios:

To get started, we first need to find the Average Fixed Asset for each company:

Average Fixed Asset = Opening Net Fixed Assets + Closing Net Fixed Assets / 2

For Company A the formula is as follows:

Average Fixed Assets = \$25,000 + \$30,000 / 2 = \$27,500

For Company B, the formula is as follows:

Average Fixed Assets = \$28,000 + \$26,000 / 2 = \$27,000

Now that we have the Average Fixed Asset totals for both Company A and Company B, we can calculate their respective fixed asset turnover ratios.

Company A:

• Net Sales \$85,000
• Average Fixed Assets: \$27,500

Fixed Asset Turnover Ratio for Company A = \$85,000 / \$27,500 = 3.09

Company B:

• Net Sales \$95,000
• Average Fixed Assets: \$27,000

Fixed Asset Turnover Ratio for Company B = \$95,000 / \$27,000 = 3.50

Based on the fixed asset turnover ratios, Company A generates \$3.09 for each dollar invested in fixed assets while Company B generates \$3.50 in sales revenue for each dollar invested in fixed assets.

Investors, analysts, and creditors would say that Company B is more efficient at using their fixed assets effectively to drive up and generate sales because they generate \$3.50 in sales revenue for each dollar invested in fixed assets.

## Key Takeaways

• Another name for Fixed Asset Turnover Ratio is “PP&E Turnover Ratio” because it measures how efficiently property, plant, and equipment is used to turnover revenue.
• Investors, creditors, and analysts use it to measure a companies operating performance.
• A higher fixed asset turnover ratio means that the company is using its investments in fixed assets effectively to drive up and generate sales.

FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.

1. IRS.gov "Publication 946 (2020), How To Depreciate Property" Page 1. October 18, 2021

2. IRS.gov "Section 6. Property and Equipment Accounting" Page 1 . October 18, 2021

3. "" Page 12. October 18, 2021