How to Calculate Fixed Asset Turnover (Plus Importance)

By Indeed Editorial Team

Published 20 June 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

It's important to understand the concept of fixed asset turnover when assessing a company's efficiency and profitability. This measure calculates how efficiently a company is using its fixed assets to generate revenue. Knowing how to calculate the fixed asset turnover ratio can help you make informed investment decisions and understand a company's financial health. In this article, we outline how to calculate this ratio in four steps, define the term, explain what the results can tell you and provide you with several different examples.

How to calculate the fixed asset turnover

Here's a detailed description of how to calculate the fixed asset turnover:

1. Find the average value of the company's fixed assets over the course of a year

The first step is to identify the cost of each fixed asset. You can usually find this information on the company's balance sheet. The reason you do this is because the cost of the asset may change over time and you want to get an accurate average.

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2. Find the average value of fixed assets

Once you have the cost of each asset, add them all up and divide by the number of years the assets were in service. This can give you the average value of your company's fixed assets. The reason for completing this step is that it provides a more accurate representation of the company's true asset value. The formula for finding the average fixed assets is:

(Cost of asset 1 + Cost of asset 2 + Cost of asset 3)/Number of years assets were in service = Average value of fixed assets

3. Calculate the company's sales

The next step is to calculate how many sales the company made. You can find this information on the income statement. Once you have the sales figure, you can divide it by the average value of the company's fixed assets. This can give you the fixed asset turnover ratio.

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4. Interpret the results

The ideal ratio can vary from industry to industry, so it's important to compare the company's ratio with others in its industry. A number of factors can affect the company's fixed asset turnover ratio, such as the type of industry it's in, the life cycle of its products and the way it finances its assets. It's important to think of these factors when interpreting the ratio.

Fixed asset turnover formula

This is the formula you use when finding the fixed asset turnover:

Annual net sales/Average fixed assets = Fixed asset turnover ratio

For example, if a company has sales of $1,000,000 and average fixed assets of $500,000, the company's fixed asset turnover ratio is 2. This means the company generates $2 in sales for every $1 of fixed assets. According to the equation below, the ratio is 2:

1,000,000/500,000 = 2

What is the fixed asset turnover ratio?

The fixed asset turnover ratio is a financial ratio that measures the efficiency of a company's use of its fixed assets. A high fixed asset turnover ratio indicates that a company is using its fixed assets efficiently while a low ratio indicates that the company isn't using them as efficiently as it can. The fixed asset turnover ratio is a good measure of a company's overall efficiency, but it's important to remember that the ratio doesn't take into account the quality of a company's products or services.

A company with a high fixed asset turnover ratio may be selling low-quality products or services while a company with a low fixed asset turnover ratio may be selling high-quality products or services. Therefore, it's important to consider the quality of a company's products when evaluating its fixed asset turnover ratio.

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What does a company's fixed asset turnover ratio show?

The fixed asset turnover ratio measures how well a company is using its assets to generate sales. This is helpful for investors when trying to decide whether or not to invest in a company. The ratio is also helpful for managers because it can give them insight into how efficient their company is when using its assets. When looking at a company's fixed asset turnover ratio, it's important to remember that there's no perfect ratio. The ideal ratio varies depending on the industry.

For example, a company in the retail industry is likely to have a higher ratio than a company in the manufacturing industry. This is because retail companies generally have less inventory and shorter product life cycles than manufacturing companies. It's also important to remember that the way a company finances its assets can affect the fixed asset turnover ratio. For example, a company that leases its assets may have a higher ratio than a company that owns its assets. This is because leased assets aren't usually included in the calculation of the ratio.

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Fixed asset turnover ratio examples

These are a two examples of the fixed asset turnover ratio:

Example 1

Review this example to learn more about calculating the fixed asset turnover ratio:

A carpenter wants to open their own business and is looking at the fixed asset turnover ratios of similar businesses in the area. The carpenter finds that the average ratio for businesses in their area is 2. They also find that their business can have annual sales of $120,000 and that they want to purchase $60,000 worth of equipment. The carpenter completes the calculation as follows:

$120,000 / $60,000 = 2

The carpenter sees that their business can have a fixed asset turnover ratio that's similar to the average for businesses in the area. This gives the carpenter some confidence that their business can be efficient in using its assets to generate sales.

Example 2

Learn about the usefulness of calculating the fixed asset turnover ratio from this example:

A business owner is trying to decide whether to buy or lease a piece of equipment. They compare the fixed asset turnover ratios of businesses in their industry that own and lease their equipment. The business owner finds that companies leasing their equipment have an average ratio of 4 and businesses that own their equipment have an average ratio of 2. The business owner completes the calculation as follows:

Fixed asset turnover for businesses that lease their equipment
= $400,000 / ($100,000 - $25,000)
= $400,000 / $75,000
= 4

Fixed asset turnover for businesses that own their equipment
= $200,000 / $100,000
= 2

The business owner sees that companies that lease their equipment are more efficient in using their assets to generate sales. This gives the business owner some confidence that leasing might be the better option for their company.

Asset turnover vs. fixed asset turnover

This is a brief introduction to how the two ratios differ:

The difference

While these two ratios have similar names, they're not the same. The asset turnover ratio measures a company's efficiency in using all of its assets to generate sales. Meanwhile, the fixed asset turnover ratio only looks at the fixed assets. This difference is evident in their formulas:

Asset turnover ratio = Sales/Total assets

Fixed asset turnover ratio = Sales/Fixed assets

Example

Here's an example for you to better understand the difference between these two ratios:

A business has annual sales of $400,000 and total assets of $200,000. Their fixed assets include $100,000 of equipment and property value which has undergone $25,000 in depreciation. The asset turnover and fixed asset turnover ratios are:

Asset turnover
= $400,000/$200,000
= 2

Fixed asset turnover
= $400,000/($100,000 - $25,000)
= $400,000/$75,000
= 4

In this example, the asset turnover ratio is 2 and the fixed asset turnover ratio is 4. This means that the business is using its assets efficiently to generate sales. Yet, the business is more efficient in using its fixed assets to generate sales than it is in using all of its assets. The asset turnover ratio is a good measure of a company's general efficiency, but the fixed asset turnover ratio is a more specific measure of a company's efficiency in using its physical assets.

What is a good fixed asset turnover value?

There's no single answer to this question since it can vary depending on the industry. For example, a ratio of 2.5 or more might be good in the retail sector, but a ratio that's between 0.25 and 0.5 is usually more preferred for a company in the utilities sector.

A good way to begin is to compare the fixed asset turnover ratios of similar businesses in the industry. If your ratio is higher than the average, it may be an indication that the business is efficient in using its fixed assets. If your ratio is lower than the average, it may be an indication that the business could improve its efficiency.

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