Describe the fixed asset turnover ratio

Answer 1

Fixed Asset Turnover

The fixed asset turnover ratio measures the relation between sales and the investment in fixed assets—property, plant, and equipment. You will likely have more difficulty understanding the notion that fixed assets "turn over" than you do in understanding turnover for inventory. A more appropriate title for the fixed asset turnover ratio might be the fixed asset productivity ratio, because it measures the amount of sales generated from a particular level of investments in fixed assets. Firms invest in fixed assets prior to experiencing increased sales from those investments.

Some analysts find the reciprocal of the fixed asset turnover ratio helpful in comparing the operating characteristics of different firms. The reciprocal ratio measures dollars of fixed assets required to generate one dollar of sales.

The analyst should interpret changes in the fixed asset turnover ratio cautiously. Firms often invest in fixed assets (for example, new production facilities) several periods before these assets generate sales from products manufactured in their plants or sold in their stores. Thus, a low or decreasing rate of fixed asset turnover may indicate an expanding firm preparing for future growth. On the other hand, a firm anticipating a decline in product sales could cut back its expenditures on fixed assets. Such an action could increase the fixed asset turnover ratio.