What is a Fixed Asset Turnover Ratio?

Fixed Asset Turnover Ratio is also known as FAT. The calculation in the form of the ratio of the profit that an investor can get from his investments is called a fixed asset turnover ratio.  This investment can be in the form of property or plant and also not forget that any types of equipment purchased by the company are also calculated in FAT. In other words, the ratio that shows you the profit in sales by any means that is property of the Company is called a Fixed asset turnover ratio.

FAT is normally used by investors or even the creditors. They use this formula to keep track of their profit they are gaining by investing in the Company. By doing this calculation they always tell them what returns they may get in the future also. On one side these investors are interested in their profit on another hand there are these creditors who are interested to know that the Company to which they have credited a sum of amount is earning enough to repay the loan or not. 

Commonly there is always a person in the management who is an insider and keeps the track and information of all the sales and purchase of the Company, which is important for the calculation with a Fixed asset turnover ratio. The calculation is more accurate if it is done by sales and purchase details.

The formula

FAT = NS / FA – AD

Here

FAT = Fixed Asset Turnover Ratio

NA = Net Sales

FA = Fixed Asset

AD = Accumulated Depreciation

It is very simple to understand, the calculation is done by dividing Net Sales by the total property, plant, and equipment excluding the allowances.

Analyzing the FAT ratio

It is simple, if you get a higher turnover then it means that the investment done is used efficiently and this also means that a good amount of sales is being generated from a small asset. Sometimes it can also mean that the company may be using some outsource for some operations it means maybe they must be self types instead of equipment. The plus point here is that instead of buying equipment's the outsource is used and sales are maintained, so the company can earn more without investing in equipment. 

It the turnover is on the lower side then it will mean that the utility of the investment is not completely efficient. There can be many reasons for this result. Maybe the products that are manufactured by the company are not in so much demand and the sales are not good for that product. It can also mean that investment in production equipment is more than it should be. There can also be many other reasons like the stop of manufacturing for some reason during the current year.

This is one formula that can easily tell you about the profit of the investment very easily, just you must have all the figures required correctly.