How to Calculate Fixed Asset Turnover Ratio using a calculator?
Our Fixed Asset Turnover Ratio Calculator is very easy to use. It will accurately calculate the fixed asset turnover ratio and help interpret the results.
We have two variations of the calculator:
You can calculate it by putting the value of net revenue and net fixed assets in the following calculator.
In the following calculator, the user calculates and updates the average net fixed assets in the calculator. The user may calculate the daily, weekly, fortnightly, monthly, or a yearly average of the net fixed assets.
What is a Fixed Asset Turnover Ratio?
The fixed asset turnover ratio is one of the efficiency ratios used by analysts to determine the overall effective utilization of the resources by a company. This ratio measures the productivity of the company’s fixed assets to generate revenue. In other words, it indicates how efficiently the management has been able to put to use its fixed investments to earn more and more revenue.
Every company has some amount of fixed assets. However, this ratio is mostly used by manufacturing companies because all manufacturing concerns have significant investments in fixed assets like building and machinery for producing the goods.
It provides useful information to investors, lenders, creditors, and management on whether the company utilizes its fixed assets optimally and adequately. Whether over the period, the company has improved the efficiency of its fixed assets over a period or not. The improvement in efficiency indicates that fixed assets are not lying idle and are put to best use.
Fixed Asset Turnover Ratio Formula
Following is the formula to calculate the fixed asset turnover ratio.
|Fixed Asset Turnover Ratio||=||———————————-|
|Net Fixed Assets|
This figure is available in the annual report and income statements of the companies. The net revenue or sales after deducting all sales returns is taken into consideration for the purpose.
Net Revenue = Gross Sales – Sales Returns
Net Fixed Assets
This figure is also taken from the annual report of the companies.
Net Fixed Assets = Gross Fixed Asset – Accumulated Depreciation
Some experts prefer the average fixed assets instead of the net fixed assets at the end of the accounting year. However, unless there is a major entry or exit of fixed assets during the year, net fixed assets fulfill the objective mostly. So from the simplicity and maintaining uniformity across companies for comparisons, the net fixed assets figure is used for the purpose.
The fixed asset turnover ratio measures the efficiency of the company in utilizing fixed assets to generate revenue.
If the ratio is high, it indicates that the company is utilizing its fixed assets efficiently. The return on capital would likely be higher in such cases, and it is taken positively by the investors and lenders.
If the fixed assets turnover ratio is too high, it may indicate that the company is not investing more in fixed assets. In other words, there may be an opportunity to expand with more fixed assets, and the company is ignoring it. It could be the non-availability of enough funds. On the other hand, it could be that the machines have depreciated over the years, and the netblock has reduced substantially. Hence, showing a higher ratio. One more possible reason could be that the company has outsourced part of the process. Therefore, the turnover and revenue are looking higher where no capital investment is involved.
If the ratio is too low, it indicates that the company is investing more in fixed assets but not utilizing them efficiently. It is of particular attention to top management. If the management does not address it, the company may enter into losses due to high depreciation costs and lower utilization of assets.
As we discussed, too high a ratio or too low a ratio may also indicate that the company has made a heavy investment. That could be in acquiring new assets, expansion is underway, or full capacity is yet to become operational.
A higher ratio is always looked at positively. However, the ratio should be used again for comparison within the same industry segment. As the ratio depends on various factors like the nature of the product, capital-intensive industry, new capacity creation, change in the technology, change in the demand pattern of the company’s products, supply and operational time of the fixed assets, age of fixed assets, outsourcing feasibility, etc. Any management decision should be on a thorough analysis of all these factors, along with other financial indicators. Any decision should not be taken in isolation or by seeing this ratio only.