April 24, 2019
Uncategorized

# What is the Fixed Asset Turnover Ratio and Why is it Important?

The purpose of any business is, of course, to generate profit, so there are a variety of metrics that business owners and investors use to assess the efficiency of a company’s business model. While many popular metrics, such as the net profit margin, measure the degree to which a business is profitable, efficiency metrics measure how well a company uses what it already owns to generate profits. The fixed asset turnover ratio is one such metric.

The formula for the fixed asset turnover ratio is as follows:

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$Fixed Asset Turnover = Net Sales / Net Fixed Assets$

FixedAssetTurnover=NetSales/NetFixedAssets﻿

For a fuller understanding of how this calculation works, it’s important to understand the individual components. Net sales, simply enough, is all operational revenue generated by the sale of goods or services, minus any deductions for returns or reduced pricing.

#### What Are Fixed Assets?

Fixed assets generally refer to those assets that cannot easily convert into cash. Current assets, such as marketable securities and accounts receivable, are not included in the fixed asset total. Common fixed assets are real estate, equipment, and vehicles. However, because fixed assets include all illiquid assets that benefit the operational efficiency of the company for an extended period, a company’s total fixed assets as reported on the balance sheet may include intangible assets, such as goodwill. For the fixed asset turnover ratio calculation, these intangible assets are subtracted from the total, yielding the net fixed asset figure. This is also often referred to as property, plant and equipment, or PP&E because these types of big-ticket investments typically make up the bulk of the net fixed asset total.

Some businesses’ PP&E totals can fluctuate throughout the year due to the sale or purchase of real estate or equipment. In these cases, the fixed asset turnover ratio uses the average net fixed assets. This average is calculated by adding the net fixed asset totals from the beginning and end of the calculation period and then dividing by two.