The fixed-asset turnover ratio equals net property, plant, and equipment divided by net sales.
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The fixed-asset turnover ratio is a financial ratio that measures how effectively a company is using its fixed assets to generate sales. The formula for this ratio is as follows:
Fixed-Asset Turnover Ratio = Net Sales / Net Property, Plant, and Equipment
Where:
– Net Sales refers to the total revenue earned by the company after deductions are made for discounts, returns, and allowances.
– Net Property, Plant, and Equipment refers to the total value of the company’s fixed assets, less any accumulated depreciation.
The fixed-asset turnover ratio reveals how efficiently a company is using its fixed assets to generate sales revenue. A higher ratio implies that the company is using its fixed assets more effectively, while a lower ratio indicates that the company is not utilizing its fixed assets efficiently.
For example, if a company’s net sales in a financial year were $100 million, and their net property, plant, and equipment were $20 million, then the fixed-asset turnover ratio would be:
Fixed-Asset Turnover Ratio = $100 million / $20 million = 5
This means that for every $1 invested in fixed assets, the company generates $5 in sales. A high turnover ratio generally indicates that the company is operating efficiently and effectively, while a low ratio may suggest that the company needs to improve its asset management or invest in additional assets to boost sales.
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