The firm may also not be under utilizing its fixed assets. There could be a problem with receivables, as the firm may have a long collection period. The firm may have unsold inventory and may be finding it difficult to sell it fast enough. This is because the presence of current assets in the ratio can lead to misinterpretation of results.Ī low total asset turnover can indicate many problems. The total asset turnover ratio should be interpreted in conjunction with the working capital turnover ratio. The fixed asset ratio is generally not very consistent, because even if the revenue is growing consistently, the fixed assets don’t have a smooth pattern. Similarly, the company is generating $0.71 for every $1 of total assets.Ī high asset turnover ratio indicates greater efficiency.Ī low asset turnover ratio indicates inefficiency, or high capital-intensive nature of the business.Ī low fixed asset turnover ratio could also mean that the company’s assets are new (less depreciation). The total asset turnover ratio will be $1,200,000/($700,000 + $1,000,000) = 0.71Ī fixed asset turnover ratio of 1.71 indicates that the company is generating $1.71 for every $1 of fixed assets. The net fixed assets include the amount of property, plant, and equipment, less the accumulated depreciation. This ratio divides net sales by net fixed assets, calculated over an annual period. The fixed asset turnover ratio will be $1,200,000/$700,000 = 1.71 Fixed Asset Turnover (FAT) is an efficiency ratio that indicates how well or efficiently a business uses fixed assets to generate sales. Its average current assets were $700,000, and average fixed assets were $1,000,000. Total Assets include both fixed assets and current assets.Īssume that a company has $1.2 million in sales for the year. Total asset turnover ratio measures how much revenue a company generates from every dollar of the total assets.į i x e d A s s e t T u r n o v e r = R e v e n u e A v e r a g e N e t F i x e d A s s e t s Fixed\ Asset\ Turnover = \frac T o t a l A sse t T u r n o v er = A v er a g e T o t a l A sse t s R e v e n u e
Fixed asset turnover ratio measures how much revenue a company generates from every dollar of fixed assets. It may not be a serious problem if the company has just made an investment in a fixed asset to modernize, for example. Fixed Asset and Total Asset turnover ratios reflect how effectively the company is using its assets, i.e., their ability to generate revenue from the given assets. Interpretation: If the fixed asset turnover ratio is low as compared to the industry or past years of data for the firm, it means that sales are low or the investment in plant and equipment is too high.
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