A company’s fixed-asset turnover ratio measures the amount of sales the company generates for every dollar of fixed assets it owns. Fixed assets are a company’s physical, long-term resources, such as buildings, land and equipment, which it expects to use for longer than one year. A company reports its fixed assets as property, plant and equipment on its balance sheet. A higher fixed-asset turnover ratio means a company uses its fixed assets more efficiently to generate sales, which can lead to higher profits.
Find a company’s balance sheet and income statement in its most recent 10-K annual report, as well as its balance sheet from its previous year’s 10-K annual report. You can get a public company’s 10-K annual report free from the U.S. Securities and Exchange Commission’s EDGAR website.
Find the amount of the most recent year’s and previous year’s net property, plant and equipment, listed in the “Assets” section of the company’s balance sheet. Net property, plant and equipment is the accounting value of the company’s property, plant and equipment after the company has subtracted accumulated depreciation. For example, assume the company’s most recent year’s balance sheet shows $100,000 in net property, plant and equipment and that its previous year’s balance sheet shows an amount of $200,000.
Add the two amounts from the previous step, then divide the result by two to calculate the average net property, plant and equipment the company had during the year. Because a company’s balance sheet shows account balances only at the end of the accounting period, you must calculate the average between two periods to estimate what the balance was during the period. In this example, add $100,000 and $200,000 to get $300,000. Then divide $300,000 by two to get an average net property, plant and equipment of $150,000.
Find the amount of the company’s net sales on its income statement. In this example, assume the company’s income statement shows $750,000 in net sales. Divide net sales by the average net property, plant and equipment to calculate the fixed-asset turnover ratio. In this example, divide $750,000 by $150,000 to get a fixed-asset turnover ratio of five. This means the company generated $5 of sales revenue for every dollar of fixed assets it owns.
Compare a company’s fixed-asset turnover ratio with that of its competitors and the industry average to determine if the company is generating sufficient sales from its fixed assets. The ratio varies between industries, so comparing ratios within a particular industry provides a way to accurately measure performance.