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Fixed Asset Turnover Ratio

Businesses use several ratios to measure performance. The fixed asset turnover ratio or FAT ratio measures how efficiently a company uses its fixed assets to generate revenue. This metric provides insights into whether the company generates enough revenue from its long-term, physical investments.

What Are Average Fixed Assets?

Answering the question of how to find fixed asset turnover ratio begins with calculating the average fixed assets or AFA. Fixed assets are physical assets that a company uses in its business operations and expects to last for more than one year. These assets include land, buildings, machinery, and equipment.

How To Calculate the Fixed Asset Turnover Ratio

Calculate this ratio by dividing a company’s sales by its AFA. Below is the fixed asset turnover formula:

Sales ÷ AFA = FAT

For example, assume Company XYZ has $100 in sales and $50 in AFA. Company XYZ’s fixed asset turnover would be $100 ÷ $50 = 2.

What Is a Good FAT Ratio?

The fixed asset turnover industry average varies. For example, companies in the retail industry generally have a higher FAT ratio than companies in the manufacturing industry because they require less capital to generate revenue.

A company’s management team and investors can use the fixed asset turnover to compare its performance to its competitors or the industry average. Accountants generally know what the standard is for their employers’ industries.

Once companies identify the industry average, it becomes easier to determine a good ratio. The higher the ratio the better.

What Are the Limitations of the Fixed Asset Turnover?

The obvious downside to FAT is that it only looks at fixed assets. This excludes cash, which is a crucial asset businesses should monitor. Consider these additional concerns:

  • The FAT ratio does not consider liabilities. A company’s ability to generate profit from its assets depends on its ability to pay its liabilities.
  • The FAT ratio does not consider the quality of the assets. A company could have a high FAT ratio because it sells its assets quickly. Still, if the assets are not generating enough revenue, the company is not performing well.
  • The FAT ratio does not consider intangibles such as patents or goodwill. These intangible assets can be significant sources of revenue for some companies.

What Is Net Asset Turnover?

The net asset turnover or NAT is similar to the fixed asset turnover, but it expands its reach. It measures how efficiently a company uses its total assets to generate revenue.

See the NAT ratio formula below:

Sales ÷ Total Assets = NAT.

For example, assume Company XYZ has $100 in sales and $50 in total assets. Company XYZ’s NAT would be $100 ÷ $50 or 2.

The fixed asset turnover is a more specific metric than the NAT because it only includes fixed assets in the calculation. As a result, the FAT ratio can provide insights that the NAT cannot, but the net asset paints a more accurate picture of total business performance.

How AR Automation Can Help

Businesses should use fixed asset turnover in conjunction with other KPIs and financial statement analysis to get a complete picture of the company. Gathering all the financial data can take time when done manually, so smart managers turn to automation. These managers are especially interested in automating the accounts receivable process to make it easier to track total assets.

Gaviti tracks cash flow and automates the sending of invoices and follow-up communications. Are these features your business can benefit from? Book a free demo to see what this software can do for you.

 

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