Definition: The Fixed Assets Turnover Ratio shows, how efficiently the fixed assets are used to generate sales. Simply, this ratio shows the efficiency of a firm in generating profits relative to the investments in the fixed assets.
The fixed assets turnover ratio is suitable for the heavy industries where huge capital is employed in the investments such as manufacturing. Thus, the ratio should be compared with the companies within the specific industries.
Also, the companies should keep in mind; that accelerated depreciation can inflate the value of the ratio, due to the reduced value of the denominator. To overcome this problem, the company should reinvest in other investments to compensate the older assets.
The formula to compute this ratio is:
Fixed Assets Turnover Ratio = Net Sales/ Gross Fixed Assets – Accumulated Depreciation
Higher the ratio, the better is the utilization of fixed assets. This means a firm is able to generate sales with the limited amount of fixed assets without raising any additional capital.
Example: Suppose a firm has a gross fixed assets worth Rs 10,00,000 with the accumulated depreciation of Rs 2,00,000. The sales for the year is Rs 12,00,000. Then the Fixed Assets Turnover Ratio will be:
Fixed Assets Turnover Ratio = 12,00,000/ (10,00,000 – 2,00,000) = 1.5 times