Fixed Asset Turnover Ratio Formula Example Calculation Explanation

This variation isolates how efficiently a company is using its capital expenditures, machinery, and heavy equipment to generate revenue. The fixed asset turnover ratio focuses on the long-term outlook of a company as fixed asset turnover ratio formula it focuses on how well long-term investments in operations are performing. The asset turnover ratio measures the efficiency of a company’s assets in generating revenue or sales.

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By using a wide array of ratios, you can be sure to have a much clearer picture, and therefore a more educated decision can be made. Companies with a higher FAT ratio are generally considered to be more efficient than companies with low FAT ratio. Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance.

DuPont Analysis

FAT measures a company’s ability to generate net sales from its fixed-asset investments, namely property, plant, and equipment (PP&E). A higher fixed asset turnover ratio indicates that a company has effectively used investments in fixed assets to generate sales. Depreciation is the allocation of the cost of a fixed asset, which is expensed each year throughout the asset’s useful life. Typically, a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue. Fixed Asset Turnover (FAT) is a financial ratio that measures a company’s ability to generate net sales from its investment in fixed assets.

This comparison will indicate whether the company is performing better or worse than others. It varies significantly; capital-intensive industries usually have lower ratios, while service-oriented industries typically have higher ratios due to lower fixed asset investments. An asset turnover ratio equal to one means the net sales of a company for a specific period are equal to the average assets for that period. The company generates $1 of sales for every dollar the firm carries in assets. With this fixed asset turnover ratio calculator, you can easily calculate the fixed asset turnover (FAT) of a company. The fixed asset turnover is a ratio that can help you to analyze a company’s operational efficiency.

1. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
2. Due to the varying nature of different industries, it is most valuable when compared across companies within the same sector.
3. By dividing the number of days in the year by the asset turnover ratio, an investor can determine how many days it takes for the company to convert all of its assets into revenue.
4. The fixed asset turnover ratio does not incorporate any company expenses.
5. Companies with a higher FAT ratio are often more efficient than companies with a low FAT ratio.
6. It is also important to compare the asset turnover ratio of other companies in the same industry.

Asset Turnover: Formula, Calculation, and Interpretation

To calculate the ratio in Year 1, we’ll divide Year 1 sales ($300m) by the average between the Year 0 and Year 1 total asset balances ($145m and $156m). Moreover, the company has three types of current assets—cash and cash equivalents, accounts receivable, and inventory—with the following carrying values recorded on the balance sheet. As you can see, Jeff generates five times more sales than the net book value of his assets. The bank should compare this metric with other companies similar to Jeff’s in his industry.

A higher FAT ratio indicates that a company is effectively utilizing its fixed assets to generate sales, showcasing management’s efficiency in asset utilization. The fixed asset focuses on analyzing the effectiveness of a company in utilizing its fixed asset or PP&E, which is a non-current asset. The asset turnover ratio, on the other hand, consider total assets, which includes both current and non-current assets. A technology company like Meta has a significantly smaller fixed asset base than a manufacturing giant like Caterpillar. In this example, Caterpillar’s fixed asset turnover ratio is more relevant and should hold more weight for analysts than Meta’s FAT ratio.

An increasing trend in fixed assets turnover ratio is desirable because it means that the company has less money tied up in fixed assets for each unit of sales. A declining trend in fixed asset turnover may mean that the company is over investing in the property, plant and equipment. The concept of the fixed asset turnover ratio is most useful to an outside observer, who wants to know how well a business is employing its assets to generate sales.