Fixed Asset Turnover Definition and Explanation

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Quick Definition

Measures a company’s effectiveness in generating sales revenue from investments made in the company.

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Fixed Asset Turnover Formula

Explanation of Fixed Asset Turnover

The Fixed Asset Turnover is similar to Total Asset Turnover, which both measure a company’s effectiveness in generating Net Sales revenue from investments back into the company. However, the Fixed Asset Turnover ratio evaluates only the Net Property Plant Equipment investments.

Manufacturing and other industries requiring major-investments will often spend heavily on properties, manufacturing plants, and equipment to push themselves ahead of the competition.

Importance of Fixed Asset Turnover

The higher the Fixed Asset Turnover ratio, the more effective the company’s investments in Net Property Plant Equipment have become. You may have to search for the explanation in the financial statements to find out what investments were made, as large capital investment purchases may not immediately yield higher sales.

It may take a year or multiple years companies to fully utilize these large investments. If you can clearly see the company invested in major improvements heavily one year, it would be wise to watch the Fixed Asset Turnover closely over the next year or more to gauge how well those investments actually helped the company.