Secondly, it is reasonable to compare the total asset turnover value with competitors. Positive is the increasing trend of the indicator during the analyzed period. First of all, the dynamics of the indicator values. To make proper conclusions on the firm's asset turnover efficiency the following should be taken into account. Lower ratios may also indicate that the firm's assets aren't being used to their full capacity. This means the high average amount of assets for one certain period, but generates positive results in future. For example, when the modernization of a plant or mass replacement of the old equipment are being made. However, sometimes low asset turnover does not necessarily indicate negative trends for a firm. Lower ratios usually indicate too heavy investments in assets or notable decline in sales. It is better to compare asset turnover ratio of a firm to industry averages, or to the firm's values of this ratio over past periods. Most commonly higher ratios indicate that less money is needed to invest for the sales generation. The normative range for total asset turnover values highly depends on the industry. The total asset turnover value measures how much goods and services are sold per every dollar of used assets during the analyzed period. Unlike the fixed asset turnover, including only property, plant and equipment to calculation, this ratio measures how efficiently company uses all of its assets. It can be calculated by dividing the net sales by average total assets. Changes in the revenue policy can affect sales which can make this ratio artificially higher or lower thereby distorting the investors perception of the efficiency of the company.Total Asset Turnover – an activity ratio measuring the ability of a firm to effectively use its assets for the generation of sales. In some ways therefore, a wildly fluctuating fixed asset turnover ratio is a measure of high risk that a company is facing.Īlso investors should be wary of changes in the revenue policy. 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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