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

Before we can begin to consider what fixed-asset turnover is, it’s helpful to review what fixed assets are in the first place. A fixed asset is any tangible piece of property, used over the long term, which a company owns and uses in its general operations. They are also known as capital assets and property, plant, and equipment (PP&E). (For more information on financial performance ratios more broadly, look to our tutorial on that subject.)

Although fixed assets represent only one type of assets a company owns, in many cases they are the largest share of the total asset pool. Fixed-asset turnover, then, is a ratio which aims to measure how productive a company’s fixed assets are when it comes to generating sales. The higher that the yearly turnover rate on these assets is, the better the company is at managing them and using them to generate sales.

Formula

The formula for fixed-asset turnover is as follows:

Fixed-asset turnover ratio = Revenue/PP&E

For a hypothetical company with annual revenue of $1 million and average fixed assets, or PP&E, of $200,000, the fixed-asset turnover ratio would be as follows:

$1,000,000/$200,000 = 5

To calculate a company’s fixed-asset turnover ratio, it’s useful to look to a company’s income statement for revenue figures and to a balance sheet for PP&E details.

Variations

There are ways to vary the fixed-asset turnover ratio to reflect other types of efficiency. For instance, some asset-turnover ratios make their calculations based on total assets. While it could be argued that this provides a fuller picture of a company’s activity, some analysts prefer fixed-asset turnover ratios because they represent a sizable component of the balance sheet, and thus a range of management decisions over different capital expenditures. The idea, then, is that capital investment and its results is, in fact, a better indicator of performance than what is evidenced in overall asset turnover.

It’s important to keep in mind that fixed-asset turnover ratios are relative. There is no specific number or threshold above which a company is doing a successful job at generating revenue from its fixed asset investments. Thus, a single calculation of fixed-asset turnover ratio is not particularly useful; rather, comparing this ratio for a single company over time or between similar companies is far more helpful.

Before placing too much trust in this particular ratio, it’s also important to keep in mind that different companies in varying industries have vastly disparate investments in fixed assets. For example, tech companies often have low fixed-asset bases relative to heavy manufacturing companies. Thus, a fixed-asset turnover ratio for a leading tech company is a less useful means of gauging performance than a similar ratio would be for a heavy manufacturing company.

Higher fixed-asset turnover ratios are often the result of comparably low investments in PP&E, rather than an indication of high sales. Companies which are not capital intensive, they are better able to generate high levels of sales on relatively low capital investment. However, some industries, such as natural resource companies, tend not to experience this.


Operating Performance Ratios: Sales/Revenue Per Employee
Related Articles
  1. Investing

    Asset Turnover Ratio

    Investopedia explains: The asset turnover ratio is a measure of a company's ability to use its assets to generate sales or revenue, and is a calculation of the amount of sales or revenue generated ...
  2. Investing

    How to Evaluate a Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  3. Investing

    Dynamic Current Ratio: What It Is And How To Use It

    Learn why this ratio may be a good alternative to the current, cash and quick ratios.
  4. Investing

    Turnover ratios and fund quality

    Learn why the turnover ratios are not as important as some investors believe them to be.
  5. Investing

    Reading The Inventory Turnover

    Inventory turnover is a ratio that shows how quickly a company uses up its supply of goods over a given time frame. Inventory turnover may be calculated as the market value of sales divided by ...
  6. Investing

    Fund Transactional Activity

    Portfolio turnover is one of the simplest measures of mutual fund quality quality. Find out how to measure it.
  7. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  8. Trading

    Seven Emerging Currencies Challenging The Forex Hierarchy

    While the top-seven currencies follow a somewhat stable hierarchy, second-tier currencies can be all over the map.
Frequently Asked Questions
  1. Does a capital expenditure (CAPEX) immediately affect income statements?

    Learn the direct and indirect effects a capital expenditure, or CAPEX, may immediately have on a business' income statements ...
  2. What is the difference between profitability and profit?

    Calculating company profit and profitability are not one and the same, and investors should understand the difference between ...
  3. What are the objectives of financial accounting?

    Learn about the principle objectives of financial accounting, including the furnishing of the financial statements for those ...
  4. What are the effects of fracking on the environment?

    Even though fracking has the potential to provide more oil and gas to consumers, the process has long-lasting negative impacts ...
Trading Center