Fixed Asset Turnover Ratio Calculator
With this fixed asset turnover ratio calculator, you can easily calculate the fixed asset turnover (FAT) of a company. The fixed asset turnover is a ratio that can help you to analyze a company's operational efficiency.
This article will help you understand what is fixed asset turnover and how to calculate the FAT using the fixed asset turnover ratio formula. We will also show you how to apply it by demonstrating some examples.
What is fixed asset turnover?
The fixed asset turnover (FAT) is one of the efficiency ratios that can help you assess a company's operational efficiency. This metric analyzes a company's ability to generate sales through fixed assets, also known as property, plant, and equipment (PP&E).
A higher fixed asset turnover ratio generally means that the company's management is using its PP&E more effectively. As fixed assets are usually a large portion of a company's investments, this metric is useful to assess the ability of a company's management. This metric is also used to analyze companies that invest heavily in PP&E or long-term assets, such as the manufacturing industry.
Luckily, our fixed asset turnover ratio calculator helps you estimate the FAT in a second! Let's see how it works.
How to calculate the fixed asset turnover? The fixed asset turnover ratio formula
Let's talk about how the fixed asset turnover formula works using an example. Assuming you have bought a stock of Company Alpha with the following information:
- Name: Company Alpha;
- Starting fixed assets: $15,000,000;
- Final fixed assets: $18,000,000; and
- Revenue: $7,500,000.
Calculating the fixed asset turnover ratio requires only 3 steps:
- Evaluate the average fixed asset
average fixed assetscan be calculated using the formula below:
average fixed assets = (starting fixed assets + final fixed assets) / 2
For our example, the
average fixed assetsis equal to
($15,000,000 + $18,000,000) / 2 = $16,500,000.
- Determine the revenue
revenueof a company is straightforward. The
revenueis always the first line item on a company's income statement. You can find the income statement in every company's annual report.
- Work out the fixed asset turnover ratio
The final step is to calculate the
fixed asset turnoverwith the fixed asset turnover formula:
fixed asset turnover = revenue / average fixed assets
fixed asset turnoverfor Company Alpha is
$7,500,000 / $16,500,000 = 0.45x.
How should we interpret the fixed asset turnover?
After understanding the fixed asset turnover ratio formula, we need to know how to interpret the results.
We generally assume that the higher the fixed asset turnover ratio, the better. This is because a high fixed asset turnover indicates that the company is effective and efficient in utilizing its fixed assets or PP&E.
However, no one rule defines what a good fixed asset turnover ratio is. As different industries have different mechanics and dynamics, they all have a different good fixed asset turnover ratio. For example, a cyclical company can have a low fixed asset turnover during its quiet season but a high one in its peak season. Hence, the best way to assess this metric is to compare it to the industry mean.
Also, a high fixed asset turnover does not necessarily mean that a company is profitable. A company may still be unprofitable with the efficient use of fixed assets due to other reasons, such as competition and high variable costs.
Can the fixed asset turnover be negative?
The short answer is no. This is because the fixed asset turnover is the ratio of the revenue and the average fixed asset. And since both of them cannot be negative, the fixed asset turnover can't be negative.
What is a good fixed asset turnover ratio?
There is no hard and fast rule on a good asset turnover. It depends on the industry that the company is in. Hence, the best way to assess this metric is to compare it to the industry mean.
Does high fixed asset turnover means the company is profitable?
No, although high fixed asset turnover means that the company utilizes its fixed asset effectively, it does not guarantee that it is profitable. A company can still have high costs that will make it unprofitable even when its operations are efficient.
What is the difference between the fixed asset turnover and asset turnover ratio?
The fixed asset focuses on analyzing the effectiveness of a company in utilizing its fixed asset or PP&E, which is a non-current asset. The asset turnover ratio, on the other hand, consider total assets, which includes both current and non-current assets.