Also, the industries which utilize light assets often do not give prompt and correct results, such as IT industries. The comparison of companies based on this ratio is possible only if they belong to a similar industry. The example indicates that the company has achieved a ratio of 4, i.e., it has used fixed assets 4 times.

Given that both the companies belong to the same industry, the ratio of company ABC is higher than that of XYZ which implies the efficiency of company ABC is better.Ī company manufacturing tires have fixed assets worth of Rs 1,00,000 with accumulated depreciation of Rs 30,000. The sales for the year 2018 and the average fixed assets are as follows:įAT Ratio = Net Sales/ Average Fixed Assets M/S XYZ and M/S ABC are a furniture manufacturing company that makes the office as well as home furniture. A higher ratio could be because the company has started outsourcing its manufacturing which keeps its sales constant and the average fixed asset requirement low.Ī lower ratio indicates inefficiency on the part of the company to utilize its assets to generate sales, which might be due to the production of items that are not in demand, overestimation of demand and therefore excess inventory and other manufacturing problems. Though there is no ideal ratio that could be set as a benchmark, the efficiency of the company is usually determined by comparing the fixed asset turnover ratio with its past records and with other competitors who exists in the same industry.Ī higher fixed asset turnover ratio indicates greater efficiency in the management of fixed assets by the company and that greater sales are generated using the fixed assets. Net sales= Gross Sales-(Sales Return+Allowances)Īverage Fixed Asset= Net Asset at the beginning of the year + closing balance/2 The formula for calculating the fixed asset turnover ratioįAT Ratio= Net sales/ Average Fixed Assets They do so to interpret the returns they might earn on their investments made in the company and make sure that the earnings/revenues from the equipment are enough so that the company can pay back the loans that it has taken for it. In other words, it measures how efficiently a company uses its fixed assets to make sales.Ĭreditors and investors refer to this ratio to identify the efficiency of the company in managing its fixed assets. A fixed asset turnover ratio is an efficiency ratio that shows the return received by a company on the investments made by them in fixed assets such as plant, machinery, equipment, etc., in relation to the total sales generated.

Fixed asset turnover ratio formula