Fixed Asset Turnover Explained: What It Is and Why It Matters

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Fixed asset turnover is a key metric that helps investors and businesses understand how effectively a company uses its fixed assets to generate revenue. By analyzing this ratio, decision-makers can gauge operational efficiency and uncover opportunities for growth. Keep reading to learn more.

What Is Fixed Asset Turnover?

Fixed asset turnover is a ratio that compares a company’s net sales to the net book value of its fixed assets, which accounts for accumulated depreciation. It highlights how efficiently a company uses its fixed assets to generate revenue.

The FAT ratio is generally used by investors to evaluate businesses in asset-heavy industries like retail or manufacturing. A higher ratio indicates greater efficiency in generating revenue from fixed assets, while a lower ratio suggests less effective utilization.

How To Calculate Fixed Asset Turnover

You can use this formula to calculate the fixed asset turnover ratio of a company:

Net sales ÷ average fixed assets = FAT

• Net sales: Total sales revenue after subtracting any returns.
• Average fixed assets: The average value of fixed assets during the period — calculated as the beginning value of fixed assets plus the ending value, divided by two.

Note: This calculation uses average fixed assets for simplicity, without accounting for accumulated depreciation. Some investors might prefer to use net fixed assets, which account for depreciation, to get a more precise measure of asset efficiency.

Example Calculation

Here’s how to calculate the FAT ratio for Company A:

• Net sales: $21 million
• Fixed assets: $7 million in existing assets + $1 million in new fixed asset purchases = $8 million total
• $21 million ÷ $8 million = 2.63:1

In this example, for every $1 in fixed assets, Company A makes $2.63. This indicates that the company is reasonably efficient in using its fixed assets to drive revenue, which could be a good sign for potential investors.

Interpretation of Fixed Asset Turnover Ratio

When calculating the fixed asset turnover ratio, a higher ratio means that a company is operating more efficiently and can earn more money for every dollar it invests in fixed assets. A low ratio may mean that a company is not using its equipment efficiently and cannot increase sales by investing in more equipment. But the ratio can vary depending on the industry.

In the manufacturing sector, a high FAT ratio is a must for growth. Manufacturing companies rely on industrial equipment to increase output, lower costs and grow sales. A FAT ratio of 3:1 or higher means the company generates $3 in revenue for every $1 invested in fixed assets. However, this ratio reflects revenue efficiency rather than profitability or return on investment, which depends on factors like cost and margins.

Factors That Impact Fixed Asset Turnover

There are several factors that can affect the fixed asset turnover ratio, including:

• Cost of specialty equipment. The cost of specialty equipment required to create a product can greatly affect the FAT ratio. The more specialized and expensive a piece of equipment is, the harder it may be to increase the FAT ratio and net sales overall.
• Industry. Different industries have different costs of equipment and manufacturing, and some industries are also cyclical. The FAT ratio may fluctuate greatly depending on the company, but may not be an indication of how the company is actually performing.
• Competition. Just because a company has a high FAT ratio, doesn’t mean it’ll stay that way. Even if a company has turned fixed assets into high net sales numbers quickly, it does not mean it will continue, especially in competitive industries and markets.
• Management. How a fixed asset is used and how efficient management is with the equipment available can affect the FAT ratio. Well-managed companies can increase profits with little extra fixed asset investments, but inefficient management can lead to lower sales and higher costs.

Comparing Fixed Asset Turnover Across Industries

The FAT ratio is best used in equipment-sensitive industries like manufacturing that rely heavily on industrial equipment to increase productivity and sales.

For instance, if a cardboard manufacturing plant invests in a state-of-the-art cardboard stamping and folding machine, the company may be able to increase output and sales. Investors would use the FAT ratio to see if the cardboard company has a history of increasing net sales and earning a positive return when investing in equipment.

But in industries that are less reliant on manufacturing output, like the retail industry, studying the FAT ratio of these retail companies may not be as accurate.

For example, if a clothing retailer purchases more efficient clothing racks or furniture to help boost sales, there are many other factors that affect those sales outside of the fixed assets. Relying solely on the FAT ratio to evaluate a clothing retailer may be misleading, as sales are influenced by many factors beyond fixed assets, such as trends, marketing and customer experience.

And there are many industries that don’t rely on fixed assets to generate income, such as financial or tech companies. So while the FAT ratio can be a helpful metric for some investors, it’s not the only financial measure to consider.

Limitations of the Fixed Asset Turnover Ratio

While the fixed asset turnover ratio can help you evaluate how efficient a manufacturing company is with its fixed asset investments, it may not be useful in other industries.

For example, a bank may invest in new furniture or equipment for conducting business — but their main increase in sales comes from hiring the right talent and crafting financial products that consumers and businesses want. The FAT ratio may not be a factor when looking to invest in a bank.

And while it’s a good idea to see how a company uses investments in large equipment to increase profits and sales, it’s not the only factor that affects net sales. A strong sales team, marketing plan, product-market fit and other factors may weigh more heavily on a company’s ability to generate sales than the use of fixed assets.

Overall, the FAT ratio is simply one metric that prudent investors will look at before investing in a company — but it should not be the only metric.

Real-World Examples

In 2023, Coca-Cola generated $45.754 billion in revenue and reported $10.905 billion in fixed assets. This gives the company a fixed asset turnover ratio of 4.2x for the year. This shows that Coca-Cola generated $4.20 in revenue for every dollar invested in fixed assets, highlighting its efficiency in utilizing these resources to drive sales.

Retail giant Amazon, on the other hand, generated $574.8 billion in revenue in 2023 and reported $264.8 billion in fixed assets. This calculation gives Amazon a fixed asset turnover ratio of 2.2x, indicating it generated $2.20 in revenue for every dollar invested in fixed assets.

Final Take

Understanding the fixed asset turnover ratio of a company can help you better evaluate how efficiently the company uses its assets to increase sales. A higher ratio may mean that the company can turn a fixed asset investment into much higher revenue and could indicate the company stock will increase in value. But the FAT ratio is best used in asset-reliant industries, and should not be the only metric studied before choosing to invest.

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