Lesson 6 of 14
Fixed Asset and Total Asset turnover ratios reflect how effectively the company is using its assets, i.e., their ability to generate revenue from the given assets. Fixed asset turnover ratio measures how much revenue a company generates from every dollar of fixed assets. Total asset turnover ratio measures how much revenue a company generates from every dollar of the total assets.
Formulas
Total Assets include both fixed assets and current assets.
Example
Assume that a company has $1.2 million in sales for the year. Its average current assets were $700,000, and average fixed assets were $1,000,000.
The fixed asset turnover ratio will be $1,200,000/$700,000 = 1.71
The total asset turnover ratio will be $1,200,000/($700,000 + $1,000,000) = 0.71
Interpretation
A fixed asset turnover ratio of 1.71 indicates that the company is generating $1.71 for every $1 of fixed assets. Similarly, the company is generating $0.71 for every $1 of total assets.
Analysis
A high asset turnover ratio indicates greater efficiency.
A low asset turnover ratio indicates inefficiency, or high capital-intensive nature of the business.
A low fixed asset turnover ratio could also mean that the company’s assets are new (less depreciation).
The fixed asset ratio is generally not very consistent, because even if the revenue is growing consistently, the fixed assets don’t have a smooth pattern.
The total asset turnover ratio should be interpreted in conjunction with the working capital turnover ratio. This is because the presence of current assets in the ratio can lead to misinterpretation of results.
A low total asset turnover can indicate many problems. The firm may have unsold inventory and may be finding it difficult to sell it fast enough. There could be a problem with receivables, as the firm may have a long collection period. The firm may also not be under utilizing its fixed assets. Reading this ratio along with other ratios will provide a more clear picture about the firm.