Fixed Asset Turnover Ratio Definition and Formula

What is Fixed Asset Turnover Ratio

Fixed asset turnover ratio is an asset management tool to evaluate the appropriateness of the level of a company’s property, plant and equipment. The fixed asset turnover ratio will show the number of dollars in sales that the business generated for each dollar of fixed assets.

The fixed asset turnover ratio is a comparison between net sales and net fixed assets which includes: property, plant, and equipment. The fixed asset turnover ratio is also known as the PP&E turnover ratio (PP&E stands for property, plant, and equipment).

• Fixed asset turnover ratio = Net sales ÷ Net fixed assets

The ratio is a summarize the efficiency in a business using their fixed asset. Normally, the higher fixed asset turnover ratio, the more efficiently the business management their fixed asset.

In contrast, the lower levels of fixed asset turnover ratio indicate that the business cannot (or just not) using their fixed asset efficiently to generate their sales, this might also indicate bad business management.

However, if the fixed asset turnover ratio is too high (I mean extremely high), the business may be close to the maximum capacity. Once the business hits the maximum capacity, this means the business cannot increase their production (and their sales) anymore.

Key Points

• Fixed asset turnover is an asset management tool to evaluate the sales that the business generated for each dollar of fixed assets.
• The fixed asset turnover ratio also known as the PP&E turnover ratio (property, plant and equipment).
• The higher fixed asset turnover ratio, the more efficiently the business management their fixed asset.

Fixed Asset Turnover Formula

The calculation of fixed asset turnover can be calculated as net sales divided by average property, plant, and equipment as the following formula.

Fixed asset turnover ratio = Net sales ÷ Net fixed assets

or;

Fixed asset turnover ratio = Net sales ÷ Average fixed aseets

In case you want to calculate the fixed asset turnover ratio by average fixed assets, its can be calculated by dividing the sum of beginning and ending fixed assets by 2.

For example, the Feriors company’s balance sheet shows the net sales of $15 million and net fixed assets for $3 million. While the industry average of fixed asset turnover is 3 times.

Fixed asset turnover ratio = $15 ÷ $3

The Feriors’s fixed asset turnover ratio is 5 times (and more than industry average) which means the company can sold 5 times more than their fixed asset and it’s a good sign since they can generate their sales more than the industry average.

Frequency Asked Question