The formula for calculating asset turnover is: asset turnover = cost of goods/total assets.

Formula to Calculate Fixed Asset Turnover Ratio

The fixed asset turnover ratio formula measures the company’s ability to generate sales using fixed assets investments. One may calculate it by dividing the net sales by the average fixed assets.

Inhaltsverzeichnis Show

• Formula to Calculate Fixed Asset Turnover Ratio
• Steps to Calculate Fixed Asset Turnover Ratio
• Examples of Fixed Asset Turnover Ratio
• Fixed Asset Turnover Ratio Formula Calculator
• Relevance and Uses
• Recommended Articles
• What is the formula for calculating asset turnover?
• What is the formula for total assets?
• Is total asset turnover the same as asset turnover ratio?
• What is the formula for Fixed Asset Turnover?

The fixed asset turnover ratio measures a company’s efficiency and evaluates it as a return on its investment in fixed assets such as property, plants, and equipment. In other words, it assesses the ability of a company to generate net sales from its machines and equipment efficiently. The formula represents as:

Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets

or

Fixed Asset Turnover = Net Sales / (Gross Fixed Assets – Accumulated Depreciation)

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For eg:
Source: Fixed Asset Turnover Ratio Formula (wallstreetmojo.com)

Steps to Calculate Fixed Asset Turnover Ratio

One can calculate the fixed asset turnover ratio using the following steps: –

1. Firstly, note the company’s net sales, which are easily available as a line item in the income statement.
2. Next, the average net fixed assets are calculated from the balance sheet by taking the average of opening and closing net fixed assets. On the other hand, one can also capture gross fixed assets and accumulated depreciation from the balance sheet to calculate the net fixed assets by deducting the accumulated depreciation from the gross fixed assets.
3. Finally, the fixed asset turnover ratio calculation is done by dividing the net sales by the net fixed assets, as shown below.

Examples of Fixed Asset Turnover Ratio

Let us see some simple to advanced examples to understand them better.

Example #1

Consider X Co. and Y Co. manufactures office furniture and distribute it to the sellers and customers in various regions of the USA. The following information for both companies is available: –

From the above table, one can calculate the following,

Calculate both companies’ fixed assets turnover ratio based on the above information. Also, compare and determine which company is more efficient in using its fixed assets.

As per the question,

Average net fixed asset for X Co. = (Opening net fixed assets + Closing net fixed assets) /2

The average net fixed asset for Y Co. = (Opening net fixed assets + Closing net fixed asset)/2

Therefore,

Fixed asset turnover ratio for X Co. = Net sales / Average net fixed assets

So, from the above calculation, the fixed asset turnover ratio for X Co. will be: –

Fixed asset turnover ratio for Y Co. = Net sales / Average net fixed assets

So, from the above calculation, the fixed asset turnover ratio for Y Co. will be: –

Therefore, Y Co. generates a sales revenue of $3.33 for each dollar invested in fixed assets compared to X Co., which produces a sales revenue of $3.19 for each dollar invested in fixed assets. Therefore, based on the above comparison, we can say that Y Co. is a bit more efficient in utilizing its fixed assets.

Example #2

Let us take the example of Apple Inc. for the fixed asset turnover ratio calculation of the fiscal year ending on September 29, 2018. As per the annual reportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company's performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more, the following information is available: –

Based on the above information, the fixed assets turnover ratio calculation for Apple Inc. will be as follows: –

As per the question,

Net fixed assets for 2017 = Gross fixed assets (2017) – Accumulated depreciation (2017)

Net fixed assets for 2018 = Gross fixed assets (2018) – Accumulated depreciation[/wsm-tooltip] (2018)

Average net fixed assets = [Net fixed assets (2017) + Net fixed assets (2018)] /2

Fixed asset turnover ratio for Apple Inc. = Net sales / Average net fixed assets

Therefore, Apple Inc. generated a [wsm-tooltip header="Sales Revenue" description=" Sales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly, or monthly as the case may be in the business entity's income statement/profit & loss account." url="https://www.wallstreetmojo.com/sales-revenue/"]sales revenueThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset's purchase price and its carrying value on the balance sheet.read more of $7.07 for each dollar invested in fixed assets during 2018.

Fixed Asset Turnover Ratio Formula Calculator

You can use the following calculator:-

Relevance and Uses

• The fixed asset turnover ratio is important for an investor and creditor who uses this to assess how well a company utilizes its machines and equipment to generate sales. This concept is important for investors because one can use it to measure the approximate return on their investment in fixed assets.
• On the other hand, the creditors use the ratio to check if the company has the potential to generate adequate cash flow from the newly purchased equipment to pay back the loan used to buy it. This ratio is typically useful in the case of the manufacturing industry, where companies have large and expensive equipment purchases.
• However, the senior management of any company seldom uses this ratio because they have insider informationInsider Information is a piece of fact, information or an understanding (M&A, New Contracts, R&D breakthrough, new product launch etc.) which could impact the prices of a listed entity or publicly-traded organizations once disclosed in the public domain. Trading based on such information is considered to be illegal.read more about sales figures, equipment purchases, and other details that are not readily available to outsiders. Instead, the management prefers to measure the return on their investments based on more detailed and specific information.
• If the company has too much invested in its assets, its operating capital will be too high. Otherwise, if the company does not have enough invested in its purchase, it might lose sales, which will hurt its profitability, free cash flowThe cash flow to the firm or equity after paying off all debts and commitments is referred to as free cash flow (FCF). It measures how much cash a firm makes after deducting its needed working capital and capital expenditures (CAPEX).read more, and eventually, stock price. The management needs to determine the right amount of investment in each asset.
• By comparing the company’s ratio to other companies in the same industry and analyzing how much others have invested in similar assets. Further, the company can track how much they have invested in each purchase yearly and draw a pattern to check the year-on-year trend.

Recommended Articles

This article is a guide to Fixed Asset Turnover Ratio Formula. We discuss fixed asset turnover ratio calculation, examples, and a downloadable Excel template. You can learn more about financial analysis from the following articles: –

• Solvency Ratio Formula
• Net Fixed AssetsNet Fixed Assets is a financial metric used to calculate the overall value of a firm’s fixed assets. You can calculate it by deducting the total depreciation or liabilities from the total amount paid for all the fixed assets. read more
• Financial Ratios List
• Equity Turnover Ratio Calculations