Fixed Asset Turnover Ratio

What Is the Fixed Asset Turnover Ratio?

The fixed asset turnover ratio (FAT) is, as a general rule, utilized by analysts to measure operating performance. This productivity ratio looks at net sales (income statement) to fixed assets (balance sheet) and measures a company's ability to create net sales from its fixed-asset investments, to be specific property, plant, and equipment (PP&E).

The fixed asset balance is utilized as a net of accumulated depreciation. A higher fixed asset turnover ratio shows that a company has successfully involved investments in fixed assets to create sales.

Grasping the Fixed Asset Turnover Ratio

The formula for the fixed asset turnover ratio is:
$\begin &\text = \frac { \text }{ \text } \ &\textbf \ &\text = \text{Gross sales, less returns, and allowances} \ &\text = \frac { \text - \text }{ 2 } \ &\text = \text{Net fixed assets' beginning balance} \ \end$
The ratio is generally utilized as a measurement in manufacturing industries that make substantial purchases of PP&E to increase output. At the point when a company makes such huge purchases, savvy investors closely monitor this ratio in subsequent years to check whether the company's new fixed assets reward it with increased sales.

Overall, investments in fixed assets will generally address the biggest part of the company's total assets. The FAT ratio, calculated every year, is built to reflect how efficiently a company, or all the more explicitly, the company's management team, has involved these substantial assets to produce revenue for the firm.

Deciphering the Fixed Asset Turnover Ratio

A higher turnover ratio is indicative of greater productivity in overseeing fixed-asset investments, however there is definitely not a precise number or reach that directs whether a company has been efficient at generating revenue from such investments. Hence, analysts and investors genuinely should contrast a company's latest ratio with the two its own historical ratios and ratio values from peer companies as well as average ratios for the company's industry as a whole.

However the FAT ratio is of critical significance in certain industries, an investor or analyst must decide if the company under study is in the proper sector or industry for the ratio to be calculated before joining a lot of weight to it.

Fixed assets shift radically starting with one company type then onto the next. For instance, consider the difference between an internet company and a manufacturing company. An internet company, like Meta (formerly Facebook), has an essentially more modest fixed asset base than a manufacturing goliath, like Caterpillar. Obviously, in this model, Caterpillar's fixed asset turnover ratio is of more importance and ought to hold more weight than Meta's FAT ratio.

Difference Between the Fixed Asset Turnover Ratio and the Asset Turnover Ratio

The asset turnover ratio utilizes total assets as opposed to zeroing in just on fixed assets as finished in the FAT ratio. Utilizing total assets acts as an indicator of a number of management's choices on capital expenditures and different assets.

Limitations of Using the Fixed Asset Ratio

Companies with cyclical sales might have more awful ratios in sluggish periods, so the ratio ought to be taken a gander at during several different time spans. Furthermore, management could be outsourcing production to reduce dependence on assets and work on its FAT ratio, while as yet attempting to keep up with stable cash flows and other business fundamentals.

Companies with strong asset turnover ratios can in any case lose money on the grounds that the amount of sales produced by fixed assets don't talk anything of the company's ability to create strong profits or sound cash flow.

Highlights

• A high FAT ratio enlightens nothing concerning a company's ability to create strong profits or cash flows.
• The fixed asset turnover ratio uncovers how efficient a company is at generating sales from its existing fixed assets.
• A higher ratio suggests that management is utilizing its fixed assets all the more successfully.