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Fixed asset turnover ratio definition

Description

Fixed asset turnover is a measure of the productivity that shows how much sales (revenues) are generated for one dollar of fixed assets. Data to calculate this ratio is collected from balance sheet income statement.

Fixed asset turnover is important for company’s owners (especially of capital intensive companies), because it shows how efficiently their PP&E (property, plant and equipment) is used. For capital intensive companies PP&E represents the biggest part in the structure of the company’s assets.

Norms and limitations

There are no common norms for the ratio, however the higher value of this ratio is better.

It is recommended to compare this ratio with those of the companies, working within the same industry. Low value might indicate that the company is overinvesting in PP&E. This ratio is mostly used while evaluating capital intensive companies.

Formula

Net sales (revenues, sales) can be described as sales deducting returns and discount for customers.

Fixed assets represent assets such as buildings, real estate, equipment and furniture that can be found in balance sheet under the long-term tangible assets.