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. IRR Rule

    A measure for evaluating whether to proceed with a project or ...
  2. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  3. Percentage Change

    Percentage change is a simple mathematical concept that represents ...
  4. Markdown

    The difference between the highest current bid price among dealers ...
  5. Catalyst

    A catalyst in equity markets is a revelation or event that propels ...
  6. Investing

    The act of committing money or capital to an endeavor with the ...
RELATED FAQS
  1. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  2. What is the 'Rule of 72'?

    The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of ... Read Full Answer >>
  3. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  4. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  5. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
  6. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
Hot Definitions
Trading Center