The fixed asset turnover ratio is a comparison between net sales and average fixed assets to determine business efficiency. ![]() This is one of the reasons why it’s not a wise choice to solely depend on the FAT ratio to estimate profitability. Since they don’t own the fixed assets themselves, the FAT ratio can be very high, even if the net sales number is poor. For example, using the FAT ratio for a technology company such as Twitter would be pointless since this kind of company has massively smaller long-term physical assets compared to, let’s say, an oil company.Īdditionally, the FAT ratio can be unreliable if the corporation is outsourcing its production, meaning another company is producing its goods. It does not have much use for business that does not rely on heavy assets. To get a feel of the company’s condition, you can compare the business’s ratio with its peers within the same field, or, you can look at the FAT ratio value from the previous years to see if there’s any indication of growth.Īs mentioned before, this metric is best used for companies that are dependent on investing in property, plant, and equipment (PP&E) to be effective. However, there’s no perfect number to this ratio for any company. Naturally, the higher the ratio, the more efficient and profitable a business is. That means, by measuring the FAT ratio, we can determine if the company is using its existing physical assets to maximize gains. Fixed assets are long-term physical assets in the form of tools and property. The FAT ratio can be useful to estimate the efficiency of a company. Furthermore, other indicators that gauge the profitability and risk of the company are also necessary to determine the performance of the business. However, a proper analyst will first compare this result with other companies in the same industry to get a proper opinion. From a general view, some may say that this company is quite successful in taking advantage of its assets to gain profit. In this case, the fixed asset turnover ratio would be 7.06.įrom this result, we can conclude that the textile company is generating about seven dollars for every dollar invested in net fixed assets. That’s why it’s vital to use other indicators to have a more comprehensive view. ![]() This is the case since the amount of the fixed asset is not that big in the first place. ![]() If a business is in an industry where it’s not necessary to have large physical assets investments, FAT may give the wrong impression. However, FAT alone can’t be the sole indicator of company profitability. By doing this calculation, we can determine the amount of income made by a company per dollar invested in net fixed assets.Ī high FAT ratio shows that a company is decently managing its fixed assets to generate sales. The ratio compares net sales with its average net fixed assets-which are property, plant, and equipment (PPE) minus the accumulated depreciation.
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