What is fixed-asset turnover?
Fixed-asset turnover is an equation that can help creditors and investors measure how effectively a business is using its fixed assets to generate sales. It’s an efficiency ratio that measures a company’s return on investment in premises and equipment.
Where have you heard about fixed-asset turnover?
While this equation can be applied to all businesses with fixed assets, it’s particularly useful when assessing a manufacturing business that’s heavily invested in premises and production equipment.
Investors can use fixed-asset turnover to assess if a company is likely to produce enough revenue from a new fixed asset to justify the cost of purchasing it. It can also be used to measure the effectiveness of assets over time and highlight risks in future purchases.
What you need to know about fixed-asset turnover.
To calculate fixed-asset turnover a company should divide its revenue by its total assets (minus any current liabilities).
Typically, the higher the fixed-asset turnover the better. A higher ratio shows that the business has less money tied up in its fixed assets, while a lower ratio could highlight that a business is at risk as a result of overinvesting in premises, equipment and other fixed assets.