What is fixed asset turnover?

Fixed asset turnover (FAT) is an efficiency ratio that assesses how effectively a business uses its fixed assets to generate sales revenue.

The ratio is calculated by dividing net sales by the average fixed asset balance over an annual period. Net fixed assets refer to the total value of fixed assets minus accumulated depreciation.

For example, a company with $1,000,000 in net sales and $500,000 in net fixed assets would have a FAT ratio of 2.0, meaning it generates $2 in sales for every $1 invested in fixed assets.

What are fixed assets?

Fixed assets are tangible, long-term assets that a business uses to support its operations and generate revenue. Unlike current assets, which are liquid and used up within a year, fixed assets, which are classified as non-current assets, provide benefits over a longer time period.

Examples of fixed assets include:

• Land, property, and buildings
• Machinery and equipment
• Furniture and fixtures
• Vehicles.

These assets are subject to periodic depreciation and impairments and will eventually be retired from use. Well-considered asset management strategies can help companies maintain a healthy FAT ratio.

Why is the fixed asset turnover ratio important?

The fixed asset turnover ratio serves various purposes. Firstly, it can provide insight into operational efficiency – particularly in asset-heavy industries, such as manufacturing, which relies on property, plant, and equipment (PP&E) investments to increase output. Generally, a higher ratio indicates that a company is effectively utilizing its fixed assets to drive revenue.

Because fixed assets often represent a large portion of a company’s total investments, the FAT ratio is also tracked by investors and stakeholders to measure whether these expenditures are contributing to increased sales. Monitoring the FAT ratio over time can give businesses and investors a snapshot into performance – an improving FAT ratio suggests that companies are better utilizing their assets, while a declining ratio could signal inefficient or overinvestment in fixed assets.

One key thing to note about fixed asset turnover ratios is that they vary by industry. Manufacturing companies, for example, will have significant PP&E investments compared to service-based companies that require fewer fixed assets. This means the benchmarks for these two industries will vary. Companies should compare their FAT ratio to industry standards and similar companies to contextualize their performance.

The FAT ratio is often analyzed alongside leverage and profitability ratios to provide a more complete picture of a company’s financial performance.

How to calculate the fixed asset turnover ratio

Fixed asset turnover is calculated by dividing net sales by average fixed assets. The fixed asset turnover ratio formula is:

Fixed Asset Turnover = Net Sales / Average Fixed Assets

Example fixed asset turnover calculation

Company XYZ has $20M in annual gross sales for the year 2024, with sales returns and allowance of $20,000. Its beginning balance for net fixed assets was $2M and its year-end balance is $2.2M.

The company’s net sales are calculated by subtracting $20,000 from the annual gross sales of $20M. To calculate average fixed assets, the beginning and year-end balances are added together and divided by two:

($2M + $2.2M) / 2 = $2.1M

The fixed asset turnover can now be calculated:

($19,980,000) / $2.1M = 9.51

Company XYZ’s fixed ass turnover ratio is approximately 9.51, which means that for every dollar invested in fixed assets, the company generates $9.51 in sales.

What does it mean to have a high or low fixed asset turnover ratio?

There’s no sweeping rule when it comes to FAT ratios and many factors need to be considered. Generally, a higher FAT ratio indicates efficient use of assets while a lower ratio can suggest that a company is not effectively using its assets.

The ‘ideal’ FAT ratio will vary between companies and industries. To truly evaluate a company’s performance, it’s important to compare their most recent FAT ratio with previous periods and ratios of similar businesses or industry benchmarks. However, below is an idea of what it can mean to have a high or low FAT ratio.

High FAT ratio

A high FAT ratio generally indicates that a company is efficiently using its fixed assets to generate revenue. For most businesses, this is a positive sign that reflects effective asset management and higher returns on asset investments. However, a high ratio can also indicate that a company isn’t reinvesting enough in fixed assets, which could potentially affect future growth.

Because the ideal FAT ratio can vary depending on industries, it’s important to compare a company’s ratio with similar businesses. For example, a retailer with minimal fixed assets will naturally have a higher FAT ratio compared to a manufacturing company with heavy equipment.

Low FAT ratio

A low FAT ratio generally suggests that a company is not efficiently using its fixed assets to generate sales. This could be a result of underperforming sales or overinvestment in assets.

In certain situations, however, a low FAT ratio is not necessarily a bad thing. For example, a business that invests in new machinery may temporarily show a lower ratio as their new assets haven’t yet contributed to revenue growth.

Companies in industries with high fixed asset requirements, like manufacturing or utilities, will naturally have lower FAT ratios.

Important considerations when interpreting the FAT ratio

To properly interpret the FAT ratio, it’s important to take into consideration the following:

• How does it compare to previous periods and other companies? To properly gauge efficiency, a company’s FAT ratio should be compared to previous periods and ratios of similar companies or industry standards.
• Is it suitable for the sector? Before relying too heavily on the FAT ratio, it’s important to measure whether it’s truly relevant for the sector a company is operating in.
• What other metrics should be used? The FAT ratio can be a useful measure of company profitability; it doesn’t provide a holistic picture. Other metrics may need to be considered to get a more accurate picture of financial performance.

Fixed asset turnover vs total asset turnover ratio

The fixed asset turnover (FAT) and total asset turnover (TAT) ratios both measure how efficiently a company utilizes its assets to generate net sales, however they focus on different types of assets. Here are some key differences between the two:

• Fixed assets vs all assets: The FAT ratio is specifically used for fixed assets, such as property, plant, and equipment, and doesn’t consider any current assets. The TAT ratio, on the other hand, considers all assets, including cash, accounts receivable, and inventory. 
• Higher vs lower ratio: Because TAT takes total assets into account, the denominator used in the formula is larger while the numerator stays the same. This means that a company’s TAT ratio will generally be lower than its FAT.
• Industry relevance: The FAT ratio is generally prioritized by industries that rely heavily on fixed assets, such as manufacturing companies. The TAT ratio may be more relevant for industries with fewer fixed asset investments, such as retail or service-based businesses, as it considers other assets (like inventory).

The role of fixed asset turnover in asset management strategies

FAT plays an important role in asset management strategies as it provides an insight into how well a company is managing and utilizing its fixed assets. Tracking this ratio can help businesses make more informed decisions about maintaining, upgrading, or replacing assets to improve operational performance and profitability.

For example, a declining FAT ratio can suggest that assets are not being utilized efficiently. This could be due to outdated or poorly maintained equipment affecting productivity and revenue generation. Keeping an eye on FAT means companies can identify these issues early on and take corrective actions by scheduling replacement or repairs. It also aids financial planning as businesses can forecast asset investment in advance and prevent unforeseen costs.

Tracking the FAT ratio can also inform a company’s broader operational strategies, like improving capital planning systems to optimize cash flow and support asset investments.

How fixed asset turnover affects company profitability

FAT ratio can provide valuable insight into a company’s overall profitability by showing how much revenue is generated for each dollar invested in fixed assets. For example, a FAT ratio of 2.0 means a company is earning $2 of revenue for every dollar invested in assets.

Generally, a higher FAT ratio means a company is efficiently utilizing its long-term assets to maximize revenue and profitability. This could mean a company has invested in the right assets, is optimizing its operations to maximize output and efficiency, and is earning higher profit margins. When a company has a rising FAT ratio, they’re effectively using their assets and could potentially scale their operations. One way companies could gain the necessary resources for growth is by leveraging global equity capital markets to raise funds for asset investment and scaling.

On the other hand, a lower FAT ratio can mean a company has outdated or improperly utilized assets, is investing in assets that don’t generate revenue, and receiving a poor return on investment. When a company has a declining FAT ratio, it could signal that it needs to improve its asset management and operational efficiency to boost productivity and profitability.

Again, FAT ratios differ between companies and sectors, so this information should be carefully analyzed alongside other important ratios to get a more holistic overview of financial performance.

How businesses can improve their fixed asset turnover ratio

A few ways that businesses can improve their fixed asset turnover ratio include:

• Using asset tracking software: Asset tracking software can make asset allocation and utilization more effective. This software typically includes features like monitoring and real-time tracking to improve asset management and guide capital investment decisions.
• Scheduling preventive maintenance: Preventive maintenance involves regularly inspecting and maintaining machinery or equipment to prevent costly downtime and breakdowns. This can improve productivity and boost a company’s FAT ratio.
• Implementing proper asset management strategies: Well-considered asset management strategies can help businesses utilize their assets more efficiently and improve the productivity of each asset.
• Selling unused assets: Companies with idle or unused assets can improve their FAT ratio by selling these assets.

Subscribe to Tactical Strategies Premium: Global Macro and get exclusive market studies and real-time updates that help you through complex markets with confidence.

This material is for informational purposes only and should not be considered as an investment recommendation or a personal recommendation.