Activity Ratios: Fixed Asset Turnover Ratio

The fixed asset turnover ratio measures a company's efficiency in using its fixed assets to generate sales.

The fixed asset turnover ratio is calculated by dividing the net sales by the average fixed assets.

Net Sales are the revenue from goods sold or services minus returns, allowances, and discounts.

Average Fixed Assets are calculated by adding the period's beginning and ending fixed assets and dividing by two.

For example, if Salt Corporation has net sales of one million dollars and average fixed assets of four hundred thousand dollars, the fixed asset turnover ratio is calculated as two point five.

This means the company generates two point five dollars in sales for every dollar invested in fixed assets.

A higher ratio indicates efficient use of fixed assets in generating sales, implying better performance and management.

Investors and analysts use this ratio to compare companies in the same industry, helping them identify which firms utilize their fixed assets more effectively to boost sales.