The fixed assets turnover measures how effectively the company uses its assets to generate sales. The higher the ratio, the better the company is at generating sales from its assets.
The fixed assets include property, plant, and equipment. Other assets such as goodwill, deferred taxes, and other non-property, plant, and equipment items are excluded to provide a more meaningful and comparative ratio. In most cases, these assets are not directly involved in generating sales and are therefore excluded.
Fixed asset turnover varies significantly from industry to industry.
For example, a manufacturing company will have a much lower fixed asset turnover compared to a service providing company with little to no assets. It is therefore important to compare the ratio with comparable companies or with in the industry itself.
A sudden decline in the fixed asset turnover ratio could be an indication that the company has recently invested significantly in fixed assets. A decline could also indicate that the company has sold fixed assets or fully depreciated assets without acquiring new assets.
Formula for Fixed assets turnover ratio
\[Fixed\,assest\,turnover= \frac{{Sales}}{{Total\,fixed\,assests}}\]
Example
Reliance Industries has sales in the amount of Rs.5,10,000 and total fixed assets in the amount of Rs.43,120, which gives a fixed asset turnover ratio of 11.82. This means that for a rupee invested in fixed assets the company is generating Rs11.82 of sales.