Fixed Asset Turnover Overview, Formula, Ratio and Examples

For example, in industries like grocery stores and retailers, whose primary asset is inventory, they need to sell their stock as fast as possible to maintain a profit. Management decisions to use a labor-intensive rather than a capital-intensive approach can affect this ratio. Companies that operate in a capital-intensive environment have a more extensive asset base than companies that use labor instead of machinery. The analysis should also include other relevant ratios, such as Working Capital Turnover Ratio and Fixed Asset Turnover Ratio. Inventory turnover or account receivable turnover are other examples of activity ratios. For instance, a service business should only compare their ratio to similar service businesses, while hospitality and retail businesses should only compare results to other hospitality or retail companies.

asset turnover ratio results that are higher indicate a company is better at moving products to generate revenue. As each industry has its own characteristics, favorable asset turnover ratio calculations will vary from sector to sector. When the business is underperforming in sales and has a relatively high amount of investment in fixed assets, the FAT ratio may be low.

How to Improve Your Asset Turnover Ratio

Generally, a higher ratio is favored because it implies that the company is efficient in generating sales or revenues from its asset base. A lower ratio indicates that a company is not using its assets efficiently and may have internal problems. Industries with low profit margins tend to generate a higher ratio and capital-intensive industries tend to report a lower ratio.

Additionally, Asset Turnover Ratio may not be as useful for companies that have a high proportion of intangible assets, such as technology companies. In these cases, investors may need to look at other metrics such as Return on Equity or Return on Assets to evaluate the company’s performance. By measuring how effectively a company is utilizing its assets to generate revenue, this ratio provides insight into a company’s operational efficiency. Additionally, comparing your business’s Asset Turnover Ratio to industry benchmarks can provide valuable insights into your company’s performance. If your ratio is significantly lower than the industry average, it may indicate that your company is not utilizing its assets efficiently and may need to reevaluate its operations and strategies. Asset turnover measures the value of a company’s revenues in relation to the value of its assets.

Problems with the Total Asset Turnover Ratio

For example, a manufacturing company may have a lower Asset Turnover Ratio compared to a service-based company due to the nature of their operations. Additionally, a high Asset Turnover Ratio does not necessarily mean that a company is profitable, as it does not take into account expenses and other financial factors. Therefore, it is important to analyze the Asset Turnover Ratio in conjunction with other financial metrics to gain a comprehensive understanding of a company’s financial health. A high Asset Turnover Ratio indicates that a company is generating a significant amount of revenue for every dollar invested in assets, which is an indicator of efficiency.

Calculating the asset turnover ratio for a single company at a single point in time isn’t very useful. The metric is most useful when compared to competing companies in the industry or when tracked over time. Once you have numbers for total sales and average assets, divide the former by the latter to get the asset turnover ratio. Companies using their assets efficiently usually have an asset turnover ratio greater than one. An asset turnover ratio of 2.67 means that for every dollar’s worth of assets you have, you are generating $2.67 in sales. Since you have your net sales and have calculated average asset value for the year, you’re ready to calculate the asset turnover ratio.

By Industry

The fixed asset turnover ratio is calculated by dividing net sales by the average balance of fixed assets of a period. Though the ratio is helpful as a comparative tool over time or against other companies, it fails to identify unprofitable companies. Asset turnover, also known as the asset turnover ratio, measures how efficiently a business uses its assets to generate sales. It’s a simple ratio of net revenue to average total assets, and it’s usually calculated on an annual basis. Investors can use the ratio to compare two companies in the same industry and determine whether one is better at allocating capital to generate sales. The asset turnover ratio helps investors understand how effectively companies are using their assets to generate sales.