Fixed Assets Turnover

It is nothing but the ratio of the sales to the fixed asset value of the company. It indirectly shows the level to which the fixed asset has influence in the business. In this calculation the current asset is generally ignored. In most of the case only tangible fixed asset are taken into consideration. Intangible asset like good will are not considered in this calculations. This ratio of the company is usually compared with the industrial ratio in order to identify the position of the company. 

Fixed asset turnover= Sales/ average fixed asset value.

Generally the higher the ratio higher is the performance of the company; it is because the higher the ratio the higher will be the efficiency with which the asset is being used. In modern day analysis these kind of analysis are not much used as it got plenty of flaws attached with it.  This kind of analysis is usually done in industry with heavy asset value. It is highly fallacy to compare this ratio between different industries; this is because some industry may have a huge asset investment whereas others may not. Comparing this type of industry using this ratio will not yield reliable and correct information needed. The following conclusion can be derived from this ratio they are,

• If the industrial ratio is more than compared to the company’s ratio then it means that the company is using outdated machines and technology and is not in par with the industrial standard. It also means that the company is lagging in using its asset to full extend.
• If the industrial ratio is less in comparison to the company’s ratio then it means that the company is pioneering the latest technology. It is using its asset to the fullest extend.
• If this ratio is abnormally high then it means that the production is at its optimum level. It cannot expand any further without expansion in the asset.

As mentioned before this value calculation takes into account only the fixed asset. This might be a huge disadvantage. In this calculation the depreciation value are generally ignored, which is not the case in real life scenario. Due to the above factor the ratio keeps on decreasing with time.

Question

• What is the need to calculate fixed asset turnover ratio?
• Does intangible asset taken into consideration while calculating fixed asset turnover ratio?