Fixed Asset Turnover FAT: Definition, Calculation & Importance

It is calculated by dividing net sales by the average balance of fixed assets of a period. Depreciation is the allocation of the cost of a fixed asset, which is expensed each year throughout the asset’s useful life. Typically, a higher fixed asset turnover ratio indicates that a company has more effectively utilized its investment in fixed assets to generate revenue. FAT measures a company’s ability to generate net sales from its fixed-asset investments, namely property, plant, and equipment (PP&E). The asset turnover ratio measures how effectively a company uses its assets to generate revenues or sales. The ratio compares the dollar amount of sales or revenues to the company’s total assets to measure the efficiency of the company’s operations. To calculate the ratio, divide net sales or revenues by average total assets. The asset turnover ratio measures the efficiency of a company’s assets in generating revenue or sales. It compares the dollar amount of sales to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets. One variation on this metric considers only a company’s fixed assets (the FAT ratio) instead of total assets. Fixed asset turnover ratio compares the sales revenue a company to its fixed assets. This ratio tells us how effectively and efficiently a company is using its fixed assets to generate fixed assets turnover ratio formula revenues. This ratio indicates the productivity of fixed assets in generating revenues. Example Of Fixed Asset Turnover Ratio The FAT ratio measures a company’s efficiency to use fixed assets for generating sales. While it indicates efficient use of fixed assets to generate sales, it says nothing about the company’s ability to generate solid profits or maintain healthy cash flows. Investments in fixed assets tend to represent the largest component of a company’s total assets. The FAT ratio, calculated annually, is constructed to reflect how efficiently a company uses these substantial assets to generate revenue for the firm. InvestingPro offers detailed insights into companies’ Fixed Asset Turnover including sector benchmarks and competitor analysis. It’s always important to compare ratios with other companies’ in the industry. Remember we always use the net PPL by subtracting the depreciation from gross PPL. Get instant access to video lessons taught by experienced investment bankers. Asset Turnover vs. Fixed Asset Turnover Publicly-facing industries including retail and restaurants rely heavily on converting assets to inventory, then converting inventory to sales. Total sales or revenue is found on the company’s income statement and is the numerator. Thus, if the company’s PPL are fully depreciated, their ratio will be equal to their sales for the period. If a company has a high fixed asset turnover ratio, it shows that the company is efficient at managing its fixed assets. This is because the fixed asset turnover is the ratio of the revenue and the average fixed asset. And since both of them cannot be negative, the fixed asset turnover can’t be negative. Companies can artificially inflate their asset turnover ratio by selling off assets. This improves the company’s asset turnover ratio in the short term as revenue (the numerator) increases as the company’s assets (the denominator) decrease. What Are Some Limitations of the Asset Turnover Ratio? Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. By outsourcing, a company might reduce its reliance on fixed assets, thereby improving its FAT ratio. However, this does not necessarily mean the company is performing well overall. Outsourcing could mask underlying issues such as unstable cash flows or weak business fundamentals. A higher FAT ratio indicates that a company is effectively utilizing its fixed assets to generate sales, showcasing management’s efficiency in asset utilization.