The fixed asset turnover ratio compares a company’s sales to the value of its fixed assets, indicating how well the company is using its assets. A high ratio can imply efficiency and less investment tied up in assets, but it may not be reliable or informative. The tangible asset ratio excludes intangible assets. It is generally only effective to compare the ratio between competitors in the same industry.
The fixed asset turnover ratio compares a company’s sales to the value of its fixed assets. In theory, it shows how well a company is using its fixed assets, although it can also indicate if a company has too much investment tied up in fixed assets. There is some debate about how reliable and informative the fixed asset turnover ratio is.
A fixed asset is something that belongs to a company and cannot be easily converted into cash. A common abbreviation for such items is “property, plant, and equipment.” As a general rule, it covers physical assets that a company would not normally expect to consume or sell in the foreseeable future. In an accounting context, a company would expect to own and productively use a fixed asset for more than one year.
The fixed asset turnover ratio is simply calculated by dividing the company’s annual sales, also known as its turnover, by the value of its fixed assets. It is important to remember that the value of any particular fixed asset will generally be considered to fall each year through depreciation. Of course, this may not change the overall value of fixed assets, since older assets may be replaced by newer ones.
There is a reduced version of the ratio, known as the tangible asset ratio. This leaves out the value of any intangible fixed assets, such as customer goodwill or brand image in a marketplace. In practice, these can be difficult to value on paper, so they may not have been included in the value of the fixed asset in the first place.
A high fixed asset turnover rate can be viewed as positive for a number of reasons. It can imply that a company is making particularly good use of its fixed assets and is therefore working efficiently. It could also give some peace of mind that a company doesn’t have too much money tied up in fixed assets. This can be a problem if a company experiences a drop in revenue and needs to sell assets to earn extra money.
Most companies do not specifically list a fixed asset turnover ratio in the accounts. However, depending on how detailed the accounts are, it may be possible to calculate or estimate the value of fixed assets. This will allow analysts to calculate the fixed asset turnover ratio and take this into account when advising potential investors. Because the type of fixed assets used varies greatly from industry to industry, it is generally only effective to make direct comparisons of the fixed asset turnover rate between competitors in the same industry.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
