Operating Performance Ratios: Fixed-Asset Turnover

Before we can begin to consider what fixed-asset turnover is, it’s helpful to review what fixed assets are in the first place. A fixed asset is any tangible piece of property, used over the long term, which a company owns and uses in its general operations. They are also known as capital assets and property, plant, and equipment (PP&E). (For more information on financial performance ratios more broadly, look to our tutorial on that subject.)

Although fixed assets represent only one type of assets a company owns, in many cases they are the largest share of the total asset pool. Fixed-asset turnover, then, is a ratio which aims to measure how productive a company’s fixed assets are when it comes to generating sales. The higher that the yearly turnover rate on these assets is, the better the company is at managing them and using them to generate sales.

Formula

The formula for fixed-asset turnover is as follows:

Fixed-asset turnover ratio = Revenue/PP&E

For a hypothetical company with annual revenue of $1 million and average fixed assets, or PP&E, of $200,000, the fixed-asset turnover ratio would be as follows:

$1,000,000/$200,000 = 5

To calculate a company’s fixed-asset turnover ratio, it’s useful to look to a company’s income statement for revenue figures and to a balance sheet for PP&E details.

Variations

There are ways to vary the fixed-asset turnover ratio to reflect other types of efficiency. For instance, some asset-turnover ratios make their calculations based on total assets. While it could be argued that this provides a fuller picture of a company’s activity, some analysts prefer fixed-asset turnover ratios because they represent a sizable component of the balance sheet, and thus a range of management decisions over different capital expenditures. The idea, then, is that capital investment and its results is, in fact, a better indicator of performance than what is evidenced in overall asset turnover.

It’s important to keep in mind that fixed-asset turnover ratios are relative. There is no specific number or threshold above which a company is doing a successful job at generating revenue from its fixed asset investments. Thus, a single calculation of fixed-asset turnover ratio is not particularly useful; rather, comparing this ratio for a single company over time or between similar companies is far more helpful.

Before placing too much trust in this particular ratio, it’s also important to keep in mind that different companies in varying industries have vastly disparate investments in fixed assets. For example, tech companies often have low fixed-asset bases relative to heavy manufacturing companies. Thus, a fixed-asset turnover ratio for a leading tech company is a less useful means of gauging performance than a similar ratio would be for a heavy manufacturing company.

Higher fixed-asset turnover ratios are often the result of comparably low investments in PP&E, rather than an indication of high sales. Companies which are not capital intensive, they are better able to generate high levels of sales on relatively low capital investment. However, some industries, such as natural resource companies, tend not to experience this.