Formula to Calculate Fixed Asset Turnover Ratio

The fixed asset turnover ratio measures a company’s efficiency and evaluates it as a return on its investment in fixed assets such as property, plants, and equipment. In other words, it assesses the ability of a company to generate net sales from its machines and equipment efficiently. The formula represents as:

Fixed Asset Turnover Ratio = Net Sales / Average Net Fixed Assets

or

Fixed Asset Turnover = Net Sales / (Gross Fixed Assets – Accumulated Depreciation)

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Steps to Calculate Fixed Asset Turnover Ratio

One can calculate the fixed asset turnover ratio using the following steps: –

Examples of Fixed Asset Turnover Ratio

Let us see some simple to advanced examples to understand them better.

  • Firstly, note the company’s net sales, which are easily available as a line item in the income statement. Next, the average net fixed assets are calculated from the balance sheet by taking the average of opening and closing net fixed assets. On the other hand, one can also capture gross fixed assets and accumulated depreciation from the balance sheet to calculate the net fixed assets by deducting the accumulated depreciation from the gross fixed assets. Finally, the fixed asset turnover ratio calculation is done by dividing the net sales by the net fixed assets, as shown below.

Example #1

Consider X Co. and Y Co. manufactures office furniture and distribute it to the sellers and customers in various regions of the USA. The following information for both companies is available: –

From the above table, one can calculate the following,

Calculate both companies’ fixed assets turnover ratio based on the above information. Also, compare and determine which company is more efficient in using its fixed assets.

As per the question,

Average net fixed asset for X Co. = (Opening net fixed assets + Closing net fixed assets) /2

The average net fixed asset for Y Co. = (Opening net fixed assets + Closing net fixed asset)/2

Therefore,

Fixed asset turnover ratio for X Co. = Net sales / Average net fixed assets

So, from the above calculation, the fixed asset turnover ratio for X Co. will be: –

Fixed asset turnover ratio for Y Co. = Net sales / Average net fixed assets

So, from the above calculation, the fixed asset turnover ratio for Y Co. will be: –

Therefore, Y Co. generates a sales revenue of $3.33 for each dollar invested in fixed assets compared to X Co., which produces a sales revenue of $3.19 for each dollar invested in fixed assets. Therefore, based on the above comparison, we can say that Y Co. is a bit more efficient in utilizing its fixed assets.

Example #2

Let us take the example of Apple Inc. for the fixed asset turnover ratio calculation of the fiscal year ending on September 29, 2018. As per the annual reportAnnual ReportAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more, the following information is available: –

Based on the above information, the fixed assets turnover ratio calculation for Apple Inc. will be as follows: –

Net fixed assets for 2017 = Gross fixed assets (2017) – Accumulated depreciation (2017)

Net fixed assets for 2018 = Gross fixed assets (2018) – Accumulated depreciation[/wsm-tooltip] (2018)

Average net fixed assets = [Net fixed assets (2017) + Net fixed assets (2018)] /2

Fixed asset turnover ratio for Apple Inc. = Net sales / Average net fixed assets

Therefore, Apple Inc. generated a [wsm-tooltip header=“Sales Revenue” description=" Sales revenue refers to the income generated by any business entity by selling its goods or providing its services during the normal course of its operations. It is reported annually, quarterly, or monthly as the case may be in the business entity’s income statement/profit & loss account." url=“https://www.wallstreetmojo.com/sales-revenue/"]sales revenueAccumulated DepreciationThe accumulated depreciation of an asset is the amount of cumulative depreciation charged on the asset from its purchase date until the reporting date. It is a contra-account, the difference between the asset’s purchase price and its carrying value on the balance sheet.read more of $7.07 for each dollar invested in fixed assets during 2018.

Fixed Asset Turnover Ratio Formula Calculator

You can use the following calculator:-

Relevance and Uses

This article is a guide to Fixed Asset Turnover Ratio Formula. We discuss fixed asset turnover ratio calculation, examples, and a downloadable Excel template. You can learn more about financial analysis from the following articles: –

  • Solvency Ratio FormulaNet Fixed AssetsNet Fixed AssetsNet Fixed Assets is a financial metric used to calculate the overall value of a firm’s fixed assets. You can calculate it by deducting the total depreciation or liabilities from the total amount paid for all the fixed assets. read moreFinancial Ratios ListEquity Turnover Ratio Calculations