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Thread: Fixed Asset Turnover
One way to judge the efficiency of business is to see how well they use their fixed assets (Machinery, Equipment etc) to generate revenues.
One way to judge the efficiency of business is to see how well they use their fixed assets (Machinery, Equipment etc) to generate revenues.
Fixed Asset Turnover is a ratio of Net Sales to Average Net Fixed Assets employed in a business.
Let's take an example, ABC Ltd. has generated revenue of Rs. 5000 crores and company has Rs. 1000 crores worth of net fixed assets in their business.
Let's take an example, ABC Ltd. has generated revenue of Rs. 5000 crores and company has Rs. 1000 crores worth of net fixed assets in their business.
Thus, Fixed Asset Turnover Ratio is 5 times. Meaning, for every Rs. 1 employed in fixed assets, the company generates revenues of Rs. 5. Higher ratio indicates efficient management of fixed assets along with optimum capacity utilization.
This ratio is useful while evaluating manufacturing companies as these businesses have to make heavy capex to grow their business.
TIP: While doing peer comparison, Always check for Fixed Asset Turnover ratio to evaluate efficient utilization. The company with higher ratio should be preferred. However, lower ratio might mean unutilized capacity which may be a positive if the demand for product is picking up.
