About Fixed Asset Turnover Ratio

What is Fixed Asset Turnover Ratio?

The Fixed Asset Turnover Ratio is a financial metric that measures how efficiently a company uses its fixed assets to generate sales. It indicates how many dollars of sales are generated for each dollar invested in fixed assets. A higher ratio suggests more efficient use of fixed assets in generating revenue.

Formula for Fixed Asset Turnover Ratio

The formula to calculate the Fixed Asset Turnover Ratio is:

\[\text{Fixed Asset Turnover Ratio} = \frac{\text{Net Sales}}{\text{Average Fixed Assets}}\]

Where:

• \(\text{Net Sales}\) is the total revenue from sales minus returns, allowances, and discounts
• \(\text{Average Fixed Assets}\) is the average value of fixed assets over the period

Calculation Steps

1. Determine the Net Sales for the period.
2. Calculate the Average Fixed Assets for the period.
3. Divide Net Sales by Average Fixed Assets.
4. The result is the Fixed Asset Turnover Ratio.

Example

Let's calculate the Fixed Asset Turnover Ratio for a company with Net Sales of $1,000,000 and Average Fixed Assets of $400,000:

1. Given: \(\text{Net Sales} = $1,000,000\), \(\text{Average Fixed Assets} = $400,000\)
2. Apply the formula: \(\text{Fixed Asset Turnover Ratio} = \frac{$1,000,000}{$400,000}\)
3. Calculate: \(\text{Fixed Asset Turnover Ratio} = 2.5\)

Visual representation:

Therefore, the Fixed Asset Turnover Ratio is 2.5, meaning the company generates $2.50 in sales for every $1 invested in fixed assets.