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Series : Ratio Analysis (17 th Post)
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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
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Next Post on Ratio Analysis: Operating Performance Ratios: Sales/Revenue
Per Employee
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