Operating Performance Ratios: Fixed-Asset Turnover
  1. Operating Performance Ratios: Introduction
  2. Operating Performance Ratios: Fixed-Asset Turnover
  3. Operating Performance Ratios: Sales/Revenue Per Employee
  4. Operating Performance Ratios: Operating Cycle

Operating Performance Ratios: Fixed-Asset Turnover

By Richard Loth (Contact | Biography)

This ratio is a rough measure of the productivity of a company's fixed assets (property, plant and equipment or PP&E) with respect to generating sales. For most companies, their investment in fixed assets represents the single largest component of their total assets. This annual turnover ratio is designed to reflect a company's efficiency in managing these significant assets. Simply put, the higher the yearly turnover rate, the better.

Formula:


Components:


As of December 31, 2005, with amounts expressed in millions, Zimmer Holdings had net sales, or revenue, of $3,286.10 (income statement) and average fixed assets, or PP&E, of $668.70 (balance sheet - the average of yearend 2004 and 2005 PP&E). By dividing, the equation gives us a fixed-asset turnover rate for FY 2005 of 4.9.



Variations:
Instead of using fixed assets, some asset-turnover ratios would use total assets. We prefer to focus on the former because, as a significant component in the balance sheet, it represents a multiplicity of management decisions on capital expenditures. Thus, this capital investment, and more importantly, its results, is a better performance indicator than that evidenced in total asset turnover.

Commentary:
There is no exact number that determines whether a company is doing a good job of generating revenue from its investment in fixed assets. This makes it important to compare the most recent ratio to both the historical levels of the company along with peer company and/or industry averages.

Before putting too much weight into this ratio, it's important to determine the type of company that you are using the ratio on because a company's investment in fixed assets is very much linked to the requirements of the industry in which it conducts its business. Fixed assets vary greatly among companies. For example, an internet company, like Google, has less of a fixed-asset base than a heavy manufacturer like Caterpillar. Obviously, the fixed-asset ratio for Google will have less relevance than that for Caterpillar.

As is the case with Zimmer Holdings, a high fixed-asset turnover ratio is more the product of a relatively low investment in PP&E, rather than a high level of sales. Companies like Zimmer Holdings are fortunate not to be capital intensive, thereby allowing them to generate a high level of sales on a relatively low base of capital investment. Manufacturers of heavy equipment and other capital goods, and natural resource companies do not enjoy this luxury.

Operating Performance Ratios: Sales/Revenue Per Employee

  1. Operating Performance Ratios: Introduction
  2. Operating Performance Ratios: Fixed-Asset Turnover
  3. Operating Performance Ratios: Sales/Revenue Per Employee
  4. Operating Performance Ratios: Operating Cycle
RELATED TERMS
  1. Fixed-Asset Turnover Ratio

    A financial ratio of net sales to fixed assets. The fixed-asset ...
  2. Asset Turnover Ratio

    The amount of sales generated for every dollar's worth of assets ...
  3. Property, Plant And Equipment - PP&E

    A company asset that is vital to business operations but cannot ...
  4. Receivables Turnover Ratio

    An accounting measure used to quantify a firm's effectiveness ...
  5. Activity Ratios

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RELATED FAQS
  1. What is the fixed asset turnover ratio and why is it important?

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  2. When is it useful to look at a company's fixed asset turnover ratio?

    Understand when it is useful to look at a company's fixed asset turnover ratio, and learn which industries are best suited ... Read Answer >>
  3. Which financial ratios are considered to be efficiency ratios?

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  4. For what kinds of businesses is the fixed asset turnover ratio most important?

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  5. What is considered to be a good fixed asset turnover ratio?

    Learn what the fixed asset turnover ratio is, how the ratio is calculated and how the fixed asset turnover ratio can be used ... Read Answer >>
  6. Why are efficiency ratios important to investors?

    Learn about efficiency ratios, such as the asset turnover ratio, and why these metrics are important to investors when analyzing ... Read Answer >>

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