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**What is Fixed asset turnover ratio?**

As part of Financial Ratio Analysis, activity ratios help in understanding the efficiency with which a company utilizes its resources.

Similarly, an important activity ratio that measures the efficiency of the company in utilizing the assets as part of operations is – Fixed asset turnover ratio

**Fixed asset turnover ratio**** meaning **

The Fixed asset turnover ratio is an activity ratio that helps in understanding the efficiency of the company in generating the revenue from its fixed assets. It indicates if the company is utilizing the fixed assets more efficiently or not.

As the name suggests, the ratio calculates the amount of revenue generated from each dollar of Fixed assets employed by the company.

It tries to build a relationship between the Fixed asset and the Revenue that the company generates.

**Fixed asset turnover ratio ****formula**

The formula for the Fixed asset turnover ratio is similar to the Asset turnover ratio.

We take * Net Sales*in the numerator and

**in the denominator.**

*Average Fixes assets***Net Sales** can be easily obtained from the company’s income statement. It is nothing but the revenue company generates after reducing sales returns, if any.

**Average Fixed assets**can be calculated from the company’s balance sheet. We take a simple average of total assets as at the current period-end and previous period-end.

Below aspects has to be kept in mind while calculating the numerator and denominator.

**Net Sales**

- Net Sales refers to normal revenue that the company generates from its core operation.
- Any unrelated income (such as interest income on deposits with banks) should not be included in the numerator.
- We need to consider both, cash sales and credit sales as part of the numerator.
- Any goods returned from the customers (Sales Return) have to be reduced.
- Hence,
**Net sales**have to be considered. - Sales value should
**not include any tax**amount collected from customers. - Hence, sales value should be net of any taxes

**Average Fixed Assets**

- Average of Fixed assets have to be considered and not mere closing total assets.
- Depreciation has to be reduced from Gross Block value. Hence, Net block value has to be considered and not Gross block value.

Let us understand the ratio with a hypothetical example.

[yuzo id=1213 ]

**Fixed Asset turnover ratio example**

Let us look at our 1st example.

We take Company A and Company B for calculating asset turnover ratio

Values given in the examples below are in **$ millions.**

Consider the below-given income statement for both the companies.

To calculate the **ratio**, we need

- Net Sales
- Average Fixed Assets

Let us **Net sales** for both the companies

**Company A**

- Sales = $ 2,000
- Sales return = $ 200
**Net sales = $1,800**

**Company B**

- Revenue = $3,000
- Sales return =$150
**Net sales = $2,850**

Now, consider the below-given Balance Sheet for both the companies.

Let us calculate **Average Fixed assets for both the companies.**

In the given example, we have total assets for only one period. Hence the same can be used as Average total assets

**Company A**

- Gross Fixed Assets =$3,000
- Less: Accumulated Depreciation = $1,000
- Net Fixed Assets =$2,000

**Company B**

- Gross Fixed Assets =$2,030
- Less: Accumulated Depreciation = $1,030
- Net Fixed Assets =$1,000

Now that we know all the values, let us calculate the turnover ratio for both the companies.

**Fixed Asset turnover ratio = Net Sales / Average Fixed Assets**

- Company A = $1,800/ $2,000 = 0.9 x
- Company B = $2,850/ $1,000 = 2.8 x

What this means is that Company A is **not managing** its Fixed Assets efficiently.

Hence, per each dollar of Fixed Asset, it is able to generate only $0.9 Revenue.

On the other hand, Company B is relatively more efficient since it is generating $2.8 per each dollar of Fixed Asset.

Hence, the Fixed Asset turnover ratio builds a relationship between the Fixed Asset base and the Revenue company derives from it.

**Fixed Asset turnover ratio using Excel**

In our next example, let us calculate the Fixed Asset turnover ratio using excel.

You can download the template for Walmart using the below option.

### Fixed Assets Turnover Ratio Template

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Below shown is the Consolidated Income Statement of Walmart.

**Net Sales**

In the case of Walmart, Net Sales can be easily calculated from the income statement.

The Sales value given in the income statement is after reducing sales return, if any.

**Net Sales =** $514,405

Now, take a look at Walmart’s consolidated Balance Sheet.

Let us calculate Average Fixed Assets for Walmart

- Fixed Assets 2018 = $114,818
- Total Assets 2019 = $111,395
- Average Fixed Assets = ($114,818 + $111,395)/2
**Average Fixed Assets = $113,106.5**

Now that we have all the values, let us calculate asset turnover ratio for Walmart.

**Fixed Asset turnover ratio = Net Sales / Average Fixed Assets**

= $514,405 / $113,107 = 4.5 x

Hence, Fixed Asset turnover ratio for Walmart is 4.5 times

What this indicates is that the company is able to $4.5 on each dollar of Fixed Assets that the company has.

On a standalone basis, the ratio of 4.5 times may not give a clear picture **unless we compare** it with other companies in the same industry.

We need to perform trend analysis to see how the ratio has moved historically.

**Fixed Asset turnover ratio interpretation**

As we have already understood, the Fixed Asset turnover ratio indicates if the company is efficient using its Fixed Assets.

**High Fixed Asset turnover ratio**

- Generally, High Fixed Asset turnover ratio indicates that the company is more efficient since it generates more revenue from each dollar of Fixed Assets.
- It may also indicate that the companies have
**peaked out their capacity utilization.** - Hence, it may have to need to perform Capex to further expand the capacity.

**Low Fixed Asset turnover ratio**

- On the other hand, a
**lower turnover ratio**indicates that the company is inefficient in managing its Fixed Assets. - A lower ratio may also indicate that the Fixed Assets of the company
**are not yet operational.** - Companies with a lower Fixed Asset turnover ratio are often faced with lower capacity utilization.
- If the Fixed Assets are utilized more efficiently, these companies will have room for major improvement.

**Trend Analysis**

To understand any financial ratios in-depth. trend analysis has to be performed.

Instead of analyzing the ratio on a standalone basis, one must look at how the ratio has moved historically.

This helps in understanding if the said ratio is sustainable in the near future.

Let’s look at how the ratio as moved historically in the case of Facebook.

As evident from the chart above, the ratio for Facebook has been decreasing gradually for the past few years.

Although Facebook is not an asset-heavy company, its turnover ratio has fallen.

Currently, Facebook Fixed Asset turnover ratio is 2.9 times.

This means that with each dollar of Fixed Assets, the company is able to generate only $2.9.

**Comparison with similar companies**

**To understand the industry dynamics, let us also look at how the asset turnover ratio for companies in different sectors is.**

We look at companies in the retail sector and also a few prominent tech-based companies.

**Walmart vs Home Depot**

The ratio profile for companies in the retail sector is almost in the same range.

Being in the retail sector, companies like Walmart and Home Depot need to manage their Fixed Assets in the most efficient manner.

In the case of Home Depot – *a home improvement retailer ( supplies tools, construction products, and various similar services),* you can observe that the turnover ratio is increasing for the past 5 years.

Currently, Home Depot Fixed Asset turnover ratio is 4.8 times.

Similarly, the ratio is increasing in the case of Walmart as well. Currently, the ratio for Walmart is 4.5x.

Hence, the turnover ratio for both companies is in the range of 4 to 5 times.

**Amazon**

**In the case of Amazon, the ratio has been falling since 2015. **This shows some difficulty in managing the Fixed Assets efficiently.

Currently, **Amazon ****Fixed asset turnover ratio is 4.2 times. This is similar to other companies like Home Depot or Walmart.**

**Facebook vs Google vs Microsoft**

When you calculate theratio for tech-based companies like Apple, Facebook, Google (Alphabet) and Microsoft, you will observe that the ratios are in lower single digits.

### Apple

In the case of Apple, the ratio has been falling since 2014 which is not a good indication.

The company’s revenue is not increasing significantly while its Fixed Asset base is gradually increasing. Hence, the turnover ratio in the case of Apple has fallen from 11 times to 6 times in the past 5 years.

The ratio was as high as 11 times. But, currently, Apple Fixed Asset turnover ratio is 6.6 times.

As already discussed as part of Trend Analysis, the turnover ratio for Facebook is falling.

Although, not an asset-heavy company, yet Facebook is unable to manage its Fixed Asset base efficiently.

Currently, Facebook Fixed turnover ratio for is 2.9 times

### Microsoft

Similar to Apple, even Microsoft company is unable to manage its Fixed Assets efficiently.

The turnover ratio for Microsoft is as low as 3.1 x. This was, back in 2014, as high as 6.3x.

Such a fall in the ratio is clear indication of inefficient management of Fixed Assets to generate Revenue.

In the case of Google, there has been no improvement in the ratio for the past 5 years. It is in the same range of 2.5 to 3 times.

Currently, Google Asset turnover ratio is mere 2.68 times.

**Next reading**

Scroll through below recommended resources or learn other important activity ratios

- Quick ratio formula
- Current ratio interpretation
- Inventory Days formula
- Low operating profit margin
- Receivable turnover ratio formula
- Payable turnover ratio example
- Inventory turnover ratio formula
- Negative working capital
- Asset turnover ratio meaning

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## FAQs

### Fixed asset turnover ratio - Formula, meaning, example and interpretation? ›

The fixed asset turnover ratio reveals how efficient a company is at generating sales from its existing fixed assets. The fixed asset turnover ratio is calculated by **dividing net sales by the average balance in fixed assets**. A higher ratio implies that management is using its fixed assets more effectively.

**What is the interpretation of the current asset turnover ratio? ›**

For example, when current assets turnover is 30%, it means that a company has sold worth Rs. 30 when it has invested Rs. 100 in the form of various current assets, such as short-term expenses, inventory, prepaid expenses, outstanding income, sundry debtors.

**What if fixed asset turnover ratio is above 1? ›**

A ratio of less than 1 indicates that the company's total assets are not generating enough revenue at the end of the year, which may be unfavorable for the company. **A ratio greater than one is generally considered favorable, indicating that the company generates sufficient revenue from its assets**.

**What is considered a good fixed asset turnover ratio? ›**

In the retail sector, an asset turnover ratio of **2.5 or more** could be considered good, while a company in the utilities sector is more likely to aim for an asset turnover ratio that's between 0.25 and 0.5.

**What does an asset turnover ratio of 0.5 mean? ›**

The formula was first used in the 1920s as part of the Dupont company's analysis and has become an industry standard since then. For example, an asset turnover ratio of 0.50 indicates that **the company in question is able to convert every dollar of assets into 50 cents worth of revenue**.

**Which asset turnover ratio is good? ›**

An asset turnover ratio of **over 1** is always considered good. A high ratio means the company is earning more revenue by fully utilising its assets. This implies that the company is generating enough net sales revenue by employing its own resources.

**How do you interpret working capital turnover ratio? ›**

**A higher working capital turnover ratio is better, and indicates that a company is able to generate a larger amount of sales**. However, if working capital turnover rises too high, it could suggest that a company needs to raise additional capital to support future growth.

**Do you want fixed asset turnover to be high or low? ›**

Typically, a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue.

**Do you want a high or low fixed asset turnover ratio? ›**

If a company's fixed asset turnover is 2.0x, it is implied that each dollar of fixed assets owned results in $2.00 of revenue. In general, the higher the fixed asset turnover ratio, the better, as the company is implied to be generating more revenue per dollar of long-term assets owned.

**What happen if fixed asset turnover is low? ›**

A low fixed asset turnover ratio indicates that **a business is over-invested in fixed assets**. A low ratio may also indicate that a business needs to issue new products to revive its sales. Alternatively, it may have made a large investment in fixed assets, with a time delay before the new assets start to generate sales.

### What is the acceptable turnover ratio? ›

For most industries, the ideal inventory turnover ratio will be **between 5 and 10**, meaning the company will sell and restock inventory roughly every one to two months. For industries with perishable goods, such as florists and grocers, the ideal ratio will be higher to prevent inventory losses to spoilage.

**What does a fixed asset turnover ratio of 4.3 indicates that for every? ›**

33A total asset turnover ratio of 4.3 indicates that: For every **$1 in sales, the firm acquired $4.3 in assets during the period**.

**What does a total asset turnover ratio of 3.8 indicates that? ›**

For every $1 in assets, the firm produced $3.8 in net sales during the period. A ratio of 3.8 indicates that **for every dollar of the average total assets invested in the operations, revenue worth $3.80 is generated**.

**What if asset turnover ratio is lower than 1? ›**

A lower asset turnover ratio signifies poor efficiency with which a company operates, which could be due to poor use of fixed assets, lacking collection methods, or limited inventory management. The low ratio means the company has potential assets that can generate revenue, but they are not being used.

**Is 0.9 a good asset turnover ratio? ›**

If the Ratio < 1

If the industry average generally falls below 0.5, and the company's ratio is 0.9, **it can be considered as performing well despite having a lower asset turnover compared to the industry average**.

**What does a total asset turnover of 1.5 times mean? ›**

What does an asset turnover of 1.5 mean? The asset turnover in the example above is therefore about 1.5. This means that **the value of the assets used is lower than the income generated from them**, which speaks for high efficiency. The company therefore uses its assets very efficiently to generate income.

**What does a higher current asset ratio indicate? ›**

In theory, the higher the current ratio, **the more capable a company is of paying its obligations** because it has a larger proportion of short-term asset value relative to the value of its short-term liabilities.

**What does a total asset turnover ratio of 3.5 indicates that? ›**

Answer and Explanation:

This means that if the asset turnover ratio is 3.50, that **sales were $3,50 and assets $1**, not the other way around. The formula does not include gross profit or net income.

**What is a good current ratio? ›**

A good current ratio is **between 1.2 to 2**, which means that the business has 2 times more current assets than liabilities to covers its debts.