What Is the Fixed Asset Turnover Ratio

Finance N Insurance
What Is the Fixed Asset Turnover Ratio
The fixed asset turnover ratio is basically a measuring tool used by the companies to
analyze or judge that how well the company’s assets are functioning to produce or bring
in the revenue or sales for the company. Moreover, the Investors and creditors also use
the Fixed Asset Turnover Ratio to know the sales of the company. Investors measure the
return on their investments which are invested in the company, whereas the creditors
make sure that the company is in a position to pay off its debts.

Fixed Asset Turnover Ratio Formula
The formula used for calculating the Fixed Asset Turnover Ratio is stated as follows:
Fixed Asset Turnover Ratio or FAT = Net Sales / Average Fixed Assets
Where in the above FAT formula:
●
the Net Sales = Gross sales – returns, and the allowances
● the Average Fixed Assets = NABB − Ending Balance / 2
● the NABB = the Net fixed assets commencement balance
●
And the net fixed assets formula = ((Total of the Fixed Assets + Total of the Current Assets) – (Total of the Current
Liabilities + Total of the Extended Period Liabilities))
The higher fixed asset turnover ratio shows that the company is using its assets in the desired and utmost way in order to
generate sales for the company

The Fixed Asset Turnover Ratio and the Asset Turnover Ratio Difference
While calculating the Asset Turnover Ratio we make use of the total assets, whereas in the calculation of the Fixed Asset
Turnover Ratio, only fixed assets are used.
The formula for the same (Fixed Asset Turnover Ratio) applies as:
● Fixed Asset Turnover Ratio or FAT = the Net Sales / Average Fixed Assets
And the formula for the Asset Turnover Ratio is as:
●
Fixed asset turnover ratio = Net annual sales ÷ (Gross fixed assets – Accumulated depreciation)

What does Fixed Asset Turnover Ratio indicate?
●
High Fixed Asset Turnover Ratio:
A High Fixed Asset Turnover Ratio indicates competence or the productivity of the business to manage the fixed assets of the
business. So, a high Fixed Asset Turnover Ratio is preferred by most of the business as it brings profitability to the business by
providing higher returns in the business.
●
Low Fixed Asset Turnover Ratio:
A low Fixed Asset Turnover Ratio indicates inadequacy or wastefulness of the professional to manage the fixed assets of the business.
So, a high Fixed Asset Turnover Ratio is not preferred by most of the business as it shows that the amount invested in the immovable
assets of the business is more than the return they are producing. Moreover, a low or decreased ratio indicated that a company or
business is investing more in the fixed assets than the desired.

How can you Improve the Fixed Asset Turnover Ratio?
There exist certain ways in which you can improve your Fixed asset turnover ratio some of which are as
follows:
1. Revenue to be increased: you need to focus on the revenue of the company or the business in
order to attain profits, which will eventually increase the Fixed asset turnover ratio.
2. Discharge the non-usable assets: the old, as well as the non-usable assets, should be discharged
off from the company as they will hamper the production of the business and eventually bring impact
on the sales of the company.
3. Lease the assets: You can also give your assets on lease which will bring revenue to the company
or the business.
4. Improve your inventory management: you need to keep a track of all your inventory and make
sure that the working of inventory is working at its pace, as it hampers the sales of the product to the
ultimate consumer.

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