Definition
The Fixed-Asset Turnover Ratio (FATR) is a financial metric that gauges how efficiently a company utilizes its fixed assets to generate sales. This ratio reflects the number of times a company’s sales are a multiple of the book value of its fixed assets within a specific accounting period. The fixed asset values can be taken from the beginning or end of the period or as an average of the two.
Formula
\[ \text{Fixed-Asset Turnover Ratio} = \frac{\text{Net Sales}}{\text{Average Net Fixed Assets}} \]
Examples
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Company A has annual net sales of $500,000 and average net fixed assets of $200,000. The Fixed-Asset Turnover Ratio would be: \[ \frac{500,000}{200,000} = 2.5 \] This ratio indicates that Company A generates $2.50 in sales for every dollar invested in fixed assets.
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Company B generates annual net sales of $1,200,000 and has average net fixed assets valued at $600,000. Using the formula, the Fixed-Asset Turnover Ratio is: \[ \frac{1,200,000}{600,000} = 2 \] This suggests that Company B generates $2.00 in sales for every dollar invested in fixed assets.
Frequently Asked Questions
What is considered a “good” Fixed-Asset Turnover Ratio?
A higher Fixed-Asset Turnover Ratio is generally favorable as it indicates efficient utilization of fixed assets. However, what constitutes a “good” ratio can vary significantly across different industries.
How are “fixed assets” defined for this ratio?
Fixed assets typically include long-term tangible assets such as buildings, machinery, and equipment that are used for productive purposes over an extended period.
Why should average fixed assets be used in the calculation?
Using the average of opening and closing fixed assets provides a more accurate reflection of asset utilization, mitigating the impact of any significant acquisitions or disposals of assets within the period.
How does the Fixed-Asset Turnover Ratio compare to other efficiency ratios?
The Fixed-Asset Turnover Ratio specifically measures the efficiency of fixed asset use, whereas other ratios like the Total Asset Turnover Ratio consider the efficiency of all assets.
Can the Fixed-Asset Turnover Ratio be negative?
No, this ratio cannot be negative because both net sales and net fixed assets are typically positive values.
What could be the reason for a declining Fixed-Asset Turnover Ratio?
A declining ratio might indicate underutilization of fixed assets, investment in new assets not yet productive, or a drop in sales revenue.
Is this ratio important for all industries?
While it’s relevant for many industries, some industries like technology or financial services with few fixed assets may not find it as significant as manufacturing or retail.
Can fixed-asset revaluation affect this ratio?
Yes, upward revaluation of fixed assets can increase the denominator, potentially lowering the ratio.
How frequently should this ratio be calculated?
It is commonly calculated on an annual basis but can be assessed quarterly for continuous monitoring.
What are the limitations of the Fixed-Asset Turnover Ratio?
The ratio does not consider asset quality or age and can be influenced by depreciated values, making it less effective for comparing companies with different asset ages.
Related Terms:
- Net Sales: Total revenue from sales minus returns, allowances, and discounts.
- Fixed Assets: Long-term tangible assets used in the production of income.
- Depreciation: The allocation of the cost of a fixed asset over its useful life.
- Efficient Utilization: The effective use of resources to produce the desired output.
Online Resources:
Suggested Books for Further Studies:
- Financial Statement Analysis by Martin S. Fridson and Fernando Alvarez
- The Interpretation of Financial Statements by Benjamin Graham
- Principles of Corporate Finance by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Accounting Basics: “Fixed-Asset Turnover Ratio” Fundamentals Quiz
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