What Is Fixed Asset Turnover Ratio? (With Applications)

By Indeed Editorial Team

Updated June 10, 2022

Published December 7, 2021

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.

A company can measure its performance in many ways, including the turnover of fixed assets. Asset utilization ratios compare a company's investment in assets to its sales numbers to draw conclusions about the company's efficiency. By using a formula to calculate the turnover rate of a company's fixed assets, you can determine the efficiency and profitability of a business. In this article, we define the fixed asset turnover ratio, compare it to the asset turnover ratio, explain how to calculate it, and share some applications and limitations of interpreting this ratio with examples.

What is the fixed asset turnover ratio?

The fixed asset turnover ratio (FAT) is a financial metric designed to measure how efficiently a company is able to generate sales compared against the value of its fixed assets. You can add the values of a company's fixed asset base to generate a total value.

Fixed assets are physical assets that a company owns and uses to generate income. Also referred to as tangible assets, fixed assets differ from current assets in that they're expected to last longer than one year. Some examples of fixed assets include machinery, vehicles, land, buildings, and computer equipment.

What is the asset turnover ratio?

The asset turnover ratio (AT) measures how efficiently companies can generate sales revenue from their collected assets. This distinction between the fixed asset turnover ratio and the asset turnover ratio is important because it means that a company has included its total assets in the calculation and not just its fixed assets. For this reason, asset turnover ratios can be more relevant in certain industries where the production of sales doesn't rely as much on the exploitation of physical assets or ones that routinely produce high sales volumes.

Analysts generally employ the asset turnover ratio to determine the relationship between investment in assets and sales generated. They want to know the value of the sales the company produces per dollar of asset owned. This can indicate how much value is being introduced into the company through the use of its physical assets. This is important information when determining which types of equipment purchases are worthwhile and don't contribute to revenue.

Asset turnover ratio vs. fixed asset turnover ratio

While both ratios compare company assets to sales, each one is more appropriate to certain industries than others. Because the FAT ratio focuses on fixed assets, it's more applicable to businesses in industries with large, high-value fixed assets, such as manufacturing or real estate.

Results derived from using the asset turnover calculations are more useful when you consider them in a broader context. Comparing the ratio number to those of similar businesses in the same industry and to the company's own ratio numbers in past years can provide more information than side-by-side comparisons with very different businesses.

Calculating the AT ratio

You can calculate the asset turnover ratio by dividing a company's net sales by the total assets it owns, as below:

Asset turnover = net sales / total assets

A higher number may indicate that a company is generating sales of a higher value per dollar of asset owned, but several internal and external factors can sometimes skew the ratio. Large one-time capital expenditures and sales of assets are two examples of external factors that can affect the results of a FAT ratio calculation. Among other more distantly related factors, general economic conditions may indirectly influence the context of a FAT ratio analysis.

Calculating the FAT ratio

You can calculate the FAT ratio using this formula:

FAT = net sales / fixed assets

To use this formula, you first calculate the company's net sales, which is the company's gross sales minus allowances, discounts, and returns. A sales allowance refers to a sale where something went wrong with the purchase and the customer received a reduced price. Discounts include any reduction in the final purchase price that a customer receives after paying their outstanding invoice early. A sales return is a purchase that a customer returns for a refund. By dividing the net sales by a company's fixed assets, you can find the FAT ratio.

Total fixed asset values may fluctuate throughout the year as a business buys and sells equipment. For this reason, analysts performing a FAT calculation often add the ending balance to the starting balance and divide it by two.

FAT ratio use cases

A FAT ratio calculation and analysis would typically be performed by an outsider. Creditors may use the FAT ratio number to estimate the income-generating potential of equipment that they have provided the financing for. This helps them ensure that the financed equipment can bring in the necessary income to pay off the loan.

Company investors may also be interested in the FAT ratio number to get a sense of how well the company is utilizing its assets. Business owners may also perform FAT ratio calculations themselves on rival businesses to estimate the efficiency of their competitors.

What is considered a good fixed asset turnover ratio?

There is no magic benchmark number that automatically signals a company is using its assets efficiently. To be useful, the ratio can be used in the context of its own industry. Comparisons between the FAT ratios of companies in different industries do not yield valuable data because different types of businesses have very different types of assets. It's more relevant to compare a company's own FAT ratio numbers with those of similar businesses and with its own ratio numbers in prior years.

As ratio numbers can still be influenced dramatically by other factors, you may wish to draw conclusions on the basis of supporting information from other sources. For example, a high turnover ratio can indicate that higher sales volumes are being generated with lower total values of assets. But it can also equally indicate a change in the company's operating procedure. It may have transferred production to a subcontractor, thus continuing to make sales while reducing the number and value of owned fixed assets.

Interpreting asset turnover ratios

From the previous example, it is clear that the FAT ratio is less useful in isolation. The best way to draw meaningful conclusions from these types of metrics is to make only relevant comparisons with similar businesses and have a general understanding of the other factors that can influence the outcome. If you are familiar with what typical ratios look like in your industry, you may be better-positioned to note when your own metrics seem to be diverging and draw more useful conclusions.

Companies may want to know how their investments in fixed assets relate to their ability to create sales and generate revenue. A company that has invested too heavily in equipment but is producing lackluster sales may find much of its operating capital tied up. Likewise, a company that doesn't invest enough in new or improved equipment may find itself being left behind by competitor innovations. FAT ratios are most immediately relevant in equipment-heavy industries, like manufacturing or construction, which typically have large amounts of capital invested in long-term physical assets like PP&E (Property, Plant, and Equipment).

Examples of FAT ratio calculations

The following examples illustrate how different businesses may calculate the FAT ratio:

Example 1

LaserSharp is a CNC precision machining workshop with a total fixed asset value of $2 million, including machinery, farm equipment, and land. LaserSharp's reported sales for the year are $1 million. LaserSharp's FAT ratio calculation is:

$1,000,000 / $2,000,000 = 0.5

This ratio indicates that LaserSharp generates $0.50 in sales for every dollar invested in long-term assets, which means the company is not profitable with its current spending.

Example 2

Iris Design is a small graphic design company with three employees and a total fixed asset value of $100,000. Iris Design's sales totalled $280,000 for the year. The company's FAT ratio calculation is:

$280,000 / $100,000 = 2.8

In this context, the FAT ratio indicates that the graphic design company is producing sales of more than twice the value per every dollar invested in tangible assets.

Example 3

Making Waves is a hair salon with a total fixed asset value of $16,000. The salon reported net sales of $26,000 for the year and wants to calculate its FAT ratio. Its FAT calculation is:

$26,000 / $16,000 = 1.625

Making Waves' FAT ratio is 1.625, indicating that the business is producing more sales per dollar of fixed asset owned.

Example 4

Topcakes is a bakery with fixed assets valued at $125, 000 and reported net sales of $164,000. The calculation for its FAT rate is:

$164,000 / $125,000 = 1.3

Topcakes' FAT ratio is 1.3, which determines that it's earning more in net sales than what it's spending on fixed assets.

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