Fixed Assets Turnover Ratio is an activity ratio (efficiency ratio) that measures how effectively and efficiently a company uses its assets or fixed assets to generate income.
This ratio shows the productivity of fixed assets in generating income. A company that has a high fixed asset turnover ratio or fixed assets shows that the company is able to manage its fixed assets efficiently and effectively. Fixed assets are very important to be calculated because these fixed assets are the largest component of the company’s total assets.
Basically, there is no standard guideline regarding the level of the best fixed assets turnover ratio. Therefore, it is necessary to compare this ratio for the same company from previous years to find out whether the company’s performance has improved or deteriorated so far.
We can also compare this Fixed Asset Turnover with companies engaged in the same field so that we know whether the company has a better or worse performance than other companies.
Investors and creditors use this formula to understand how well the company uses their equipment and machines which are classified as fixed assets to generate income or sales.
This ratio is important for investors to measure the return on their investment, especially in manufacturing industries that require the purchase of large and expensive production equipment or machines.
As for the Creditor, the Creditor wants to ensure that the company can generate sufficient income from the equipment or machine that he just bought to pay back the loan.
How to Calculate Fixed Asset Turnover Ratio
The following is how to calculate the Fixed Assets Turnover Ratio which consists of formula and an example of a case.
Fixed Asset Turnover Ratio formula
Fixed assets or fixed assets (Fixed Assets) are company assets that are relatively high in value and can be used for more than 1 year (durable) in the company’s operations.
In the Statement of Financial Accounting Standards (SFAS) No. 16 of 2015 states that ” Fixed assets are tangible assets that are used for more than one period (one year) and are owned by the company to be used in the production process or supply of goods and services, to be leased to other parties or for administrative purposes “. Fixed assets or fixed assets can be in the form of land, buildings, machinery, work equipment, and vehicles.
Fixed Assets Turnover Ratio is calculated by dividing net sales by the number of fixed assets or fixed assets.
Fixed Asset Turnover Ratio = Net Sales / Fixed Assets
Example of Calculation of Fixed Asset Turnover Ratio
A company engaged in the manufacturing of canned food wants to apply for a loan from the bank. In 2017, the Company had Net Sales of Rp. 200 million with total fixed assets (fixed assets) he owns of Rp. 150 million. What is the company’s Fixed Asset Turnover Ratio?
Net Sales = $ 200,000
Total fixed assets = $. 150,000
Fixed Asset Turnover Ratio =?
Fixed Asset Turnover Ratio = Net Sales / Fixed
Assets Turnover Ratio of Fixed Assets = 200,000 / 150,000
Fixed Asset Turnover Ratio = 1.33
So the Fixed Assets Turnover Ratio is 1.33 times.
Assessment of Fixed Assets Turnover Ratio
High fixed asset turnover indicates that fixed assets are used efficiently and the number of sales is generated using only a small amount of assets. On the other hand, a low fixed asset turnover ratio indicates that the company is not using its assets efficiently and effectively.
A low ratio can also be caused by several factors, such as excess production but no demand for the products it produces or using too many machines to produce its products. It could also be due to supply chain constraints so that the number of products produced does not match expectations.