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The fixed asset turnover ratio compares a company's sales to the value of its fixed assets. In theory, it shows how well a company is using its fixed assets, though it may also indicate whether a company has too much investment tied up in fixed assets. There is some debate about how reliable and informative the fixed asset turnover ratio is.
A fixed asset is something that belongs to a company and cannot easily be converted to cash. A common shorthand for such items is, "property, plant and equipment." As a general rule, it covers physical assets that a company would not normally expect to consume or sell in the foreseeable future. In an accounting context, a company would expect to own and productively use a fixed asset for more than one year.
The fixed asset turnover ratio is simply calculated by dividing the company's annual sales, also known as its turnover, by the value of its fixed assets. It's important to remember that the value of any particular fixed asset will usually be considered to drop each year through depreciation. Of course, this may not change the overall value of fixed assets, as older assets may be replaced with newer ones.
There is a narrow version of the ratio, known as the tangible asset ratio. This leaves out the value of any intangible fixed assets, such as the goodwill of customers or brand image in a marketplace. In practice, these can be hard to value on paper, so they may not have been included in the fixed asset value in the first place.
A high fixed asset turnover ratio can be seen as a positive for several reasons. It may imply that a company is making particularly good use of its fixed assets and thus working efficiently. It could also give some reassurance that a company does not have too much money tied up in fixed assets. This can be a problem if a company suffers a slump in income and needs to sell off assets to get extra cash.
Most companies do not specifically list a fixed asset turnover ratio in accounts. Depending on how detailed the accounts are, though, it may be possible to either calculate or estimate the value of fixed assets. This will allow analysts to work out the fixed asset turnover ratio and take this into account when giving advice to potential investors. Because the type of fixed assets that are used varies immensely from industry to industry, it is usually only effective to make direct fixed asset turnover ratio comparisons between competitors in the same industry.
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