How to Leave Depreciation in a Fixed Asset Turnover Calculation

by Bryan Keythman

A company’s fixed asset turnover measures its ability to use its property, plant and equipment to produce sales revenue. Fixed assets are long-term assets, which typically have a significant cost. A company strives to use these assets efficiently to be successful. Fixed-asset turnover equals sales divided by net fixed assets. This is the accounting value of the fixed assets after depreciation has been subtracted. Depreciation is a periodic accounting charge that reduces an asset’s value. You can replace net fixed assets with gross fixed assets to leave depreciation in the calculation.

Find a company’s balance sheet and income statement in its 10-K annual report. You can obtain this report online from the investor relations section of a company’s website, or from the U.S. Securities and Exchange Commission’s EDGAR database.

Find the amount of the company’s net fixed assets and the amount of accumulated depreciation on its balance sheet. For example, assume the company has $500,000 in net fixed assets and $100,000 in accumulated depreciation.

Add accumulated depreciation to net fixed assets to calculate gross fixed assets, which is the value of the assets before any depreciation expenses have been subtracted. In this example, add $100,000 and $500,000 to get $600,000 in gross fixed assets.

Find the amount of the company’s sales on its income statement. If the income statement shows net sales, use net sales. In this example, assume the company had $2.4 million in sales for the year.

Divide the amount of sales by the amount of gross fixed assets to calculate fixed asset turnover. Continuing with the example from the previous steps, divide $2.4 million by $600,000 to get a fixed asset turnover of four. This means the company produced sales equal to four times the value of its fixed assets before depreciation charges.

Tip

  • Compare a company‚Äôs fixed-asset turnover over different accounting periods, and with those of other companies in its industry. A company that increases its fixed-asset turnover over time, and has a turnover higher than its competitors is using its fixed assets efficiently to produce sales.

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