2/2/2024 0 Comments Fixed asset turnover ratio![]() A lower ratio reflects many problems such as unsold inventory or underutilization of fixed assets. A high total asset turnover ratio shows good efficiency of the company. The total assets turnover ratio is a ratio that shows the relationship between the total assets of the company and its sales. This ratio is usually not very consistent because the value of the fixed asset is continuously depreciating even when the sales are constant.įAT Ratio= Net Sales/Average Fixed Assets A higher ratio shows good efficiency and vis-à-vis. Difference between fixed asset turnover ratio and total asset turnover ratioĪs seen above, the fixed asset turnover ratio defines the relationship between the fixed assets owned by the company and the sales generated by it. which in turn might adversely affect the fixed asset turnover ratio even though the sales are better then estimated. Therefore, the FAT ratio should be checked during both on and off-season of sales for the company.Ĭompanies might even outsource their manufacturing activities to other enterprises which reduces the need for them to own fixed assets such as equipment, machinery, etc. The companies which experience a cyclic or seasonal sale might show the worst ratio during slow periods or during off-seasons. Hence, it is subject to management’s discretion over the use of accounting policies with respect to sales and fixed assets. Two companies having similar asset model and sales might show different fixed assets turnover ratio because of differences in accounting policies of depreciation. ![]() This results in a difference in the results of a comparison of fixed assets turnover ratio over the industry. Therefore, the fixed asset turnover ratio should be analyzed over a variety of profit and revenue ratios.Ĭompanies in the same or separate industry can have different accounting policies concerning the depreciation methods followed. A reduction in such turnover ratio can lead to the management searching for obsolete assets, while in reality, revenue might have reduced due to independent reasons. The FAT ratio only measures the correlation between a fixed asset and net sales and not the cause of what impacts those figures. Also, the industries which utilize light assets often do not give prompt and correct results, such as IT industries. The comparison of companies based on this ratio is possible only if they belong to a similar industry. ![]() The example indicates that the company has achieved a ratio of 4, i.e., it has used fixed assets 4 times. Given that both the companies belong to the same industry, the ratio of company ABC is higher than that of XYZ which implies the efficiency of company ABC is better.Ī company manufacturing tires have fixed assets worth of Rs 1,00,000 with accumulated depreciation of Rs 30,000. The sales for the year 2018 and the average fixed assets are as follows:įAT Ratio = Net Sales/ Average Fixed Assets M/S XYZ and M/S ABC are a furniture manufacturing company that makes the office as well as home furniture. A higher ratio could be because the company has started outsourcing its manufacturing which keeps its sales constant and the average fixed asset requirement low.Ī lower ratio indicates inefficiency on the part of the company to utilize its assets to generate sales, which might be due to the production of items that are not in demand, overestimation of demand and therefore excess inventory and other manufacturing problems. Though there is no ideal ratio that could be set as a benchmark, the efficiency of the company is usually determined by comparing the fixed asset turnover ratio with its past records and with other competitors who exists in the same industry.Ī higher fixed asset turnover ratio indicates greater efficiency in the management of fixed assets by the company and that greater sales are generated using the fixed assets. Net sales= Gross Sales-(Sales Return+Allowances)Īverage Fixed Asset= Net Asset at the beginning of the year + closing balance/2 The formula for calculating the fixed asset turnover ratioįAT Ratio= Net sales/ Average Fixed Assets ![]() They do so to interpret the returns they might earn on their investments made in the company and make sure that the earnings/revenues from the equipment are enough so that the company can pay back the loans that it has taken for it. In other words, it measures how efficiently a company uses its fixed assets to make sales.Ĭreditors and investors refer to this ratio to identify the efficiency of the company in managing its fixed assets. A fixed asset turnover ratio is an efficiency ratio that shows the return received by a company on the investments made by them in fixed assets such as plant, machinery, equipment, etc., in relation to the total sales generated.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |