Monday, August 11, 2014

Operating Performance Ratios : Fixed-Asset Turnover

Series : Ratio Analysis    (17 th Post)


This Ratio helps us to understand the productivity of a Fixed Assets (Property Plant And Equipments ) in Generating Revenue for a Company.This Ratio is designed to reflect Companys  efficiency in managing this assets.

A high asset turnover ratio is desirable as compared to a low ratio since the former is indicative of better operating performance. A higher asset turnover ratio symbolizes greater shareholder wealth.

Total assets include current assets, fixed assets and intangible assets such as licenses and goodwill. Fixed assets entail huge initial investments that are undertaken with the hope of maximizing revenue. Hence, the fixed-asset turnover ratio is a better measure of operating performance as compared to the total asset turnover ratio.

The amount of capital investment varies depending on the type of business. For instance, oil production and refining and the telecommunications industry is highly capital intensive while the restaurant business or for that matter, agriculture, is labor intensive. The proportion of labor costs in relation to the capital required, for producing a given volume of goods and services, is used to determine whether the process is labor intensive or capital intensive.

Fixed asset turnover ratio is more relevant for capital intensive industries since the size of the fixed asset base depends on whether the process of production is labor intensive or capital intensive. In general, companies that are labor intensive have a higher fixed asset turnover ratio as compared to companies that are capital intensive. Hence, one should compare firms within the same industry rather than comparing them across industries to get a true picture of a firm's relative operating performance. One should also compare a firm's past performance with the current performance for a better understanding of the company's prospects.

Formula:  Fixed Asset TurnOver Ratio % = Revenue  /  Property,Plant & Equipment

Next Post on Ratio Analysis:  Operating Performance Ratios: Sales/Revenue Per Employee

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