If increases in fixed assets lead to disproportionate increases in sales, then the firm has a high operating leverage. The fixed asset turnover ratio provides the best estimate of the operating leverage of the firm. Some companies use an average of the other companies in the industry to benchmark their performance against whereas others look at the best in the field and try to compete with them. Service oriented companies usually have less fixed capital requirement as compared to heavy manufacturing. Same industry is important because different industries have different fixed capital requirements.
Efforts must be made to ensure that extraneous variables like general condition of the economy et al are nullified to get a true picture of the state of affairs.Īnother popular comparison is to benchmark the fixed asset turnover ratio of a company with those of other companies in the same industry. If the company has made a new addition to the fixed assets, one can find out the new fixed asset turnover ratio and compare it with the old fixed asset turnover ratio and see if there have been any substantial improvements as a result of the addition. The best comparison in with the companys past records itself. Dividing the two numbers and getting a third number makes little sense unless you can compare it with something. The fixed asset turnover ratio is best applied when there is adequate context. The Formulaįixed Asset Turnover Ratio = Sales Revenue / Total Fixed Assets (Average of the two balance sheets) How to Apply It? While it is impossible to come up with a single number that explains the efficiency of the company in utilizing its fixed assets, the fixed asset turnover ratio comes close. It is therefore important that a company keeps a close eye on whether these investments are performing well and generating adequate revenue and profit to justify the expenditure. property, plant and equipment represent the single largest investment any company makes in its operations.
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