Fixed Assets Turnover Ratio

Fixed assets turnover ratio is an activity ratio that measures how successfully a company is utilizing its fixed assets in generating revenue. It calculates the dollars of revenue earned per one dollar of investment in fixed assets.

A higher fixeds asset turnover ratio is generally better. However, there might be situations when a high fixed asset turnover ratio might not necessarily mean efficient use of fixed assets as explained in the example.

Formula

Fixed Assets Turnover Ratio
=Net Revenue
Average Fixed Assets

Net Revenue = Gross Revenue − sales returns

Average Fixed Assets =Opening Balance of Fixed Assets + Ending Balance of Fixed Assets
2

Example

The following table outlines information required to calculate fixed assets turnover for Facebook, Inc. (NYSE: FB), Linkedin Corporation (NYSE: LNKD) and Wal-mart Stores Inc. (NYSE: WMT). All amounts are in million dollars.

FBLNKDWMT
Net revenue5,089972469,162
Fixed asset at the start of most recent year1,475115112,324
Fixed asset at the end of the most recent year2,391187116,681

Calculate and interpret their fixed assets turnover ratio.

Solution

Fixed assets turnover ratio of FB = 5,089 = 2.63
(1,475 + 2,391) ÷ 2
Fixed assets turnover ratio of LNKD = 972 = 6.44
(115 + 187) ÷ 2
Fixed assets turnover of WMT = 469,162 = 4.06
(112,324 + 116,681) ÷ 2

The figures tell that LinkedIn Corporation has most efficiently used its fixed assets. It generated $6.44 of revenue per $1 dollar of its net fixed assets over the year. Facebook, Inc. on the other hand, generated a fixed asset turnover ratio of 2.63, which means $2.63 of revenue per $1 of investment in fixed assets. LinkedIn and Facebook are competitors with almost the same age; hence the comparison using fixed asset turnover ratio is very relevant. LinkedIn appears to be the clear winner on this parameter.

Comparison between Facebook and Walmart on fixed asset turnover ratio might not be very useful because they belong to different industries and they have different age. Wal-Mart's higher fixed asset turnover ratio might be due to old age (and hence lower book value) of Wal-Mart's assets. Lower book value of fixed assets means smaller denominator in the ratio and hence higher fixed asset turnover ratio. There might be difference in capital intensity requirements of the industry.

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork