The sales to fixed assets ratio, also known as the fixed asset turnover ratio, measures the efficiency of a business in using fixed assets to generate revenue.
Investment levels in fixed assets vary across different industries, for example, manufacturing industries require a relatively large investment in fixed assets to generate a given level of sales compared to financial services industries. These fixed assets are always in the form of land, buildings, machinery and other equipment.
In the company’s balance sheet, these assets are grouped as property, plant, and equipment. Sales to fixed assets is a performance measurement tool used to gauge how well a company utilizes its fixed assets to support a given level of sales.
This ratio compares the company’s net sales to its amount of fixed assets thereby measuring the number of net sales made by investing a unit dollar of total fixed assets. Investor-analysts are always keen on this ratio since it provides long-term patterns on the level of property, plant, and equipment a company requires to generate revenues. Whenever possible, the analyst-investor should avoid using a consolidated balance sheet if certain segments of a company are more capital intensive than others.
High sales to fixed asset ratio imply that the business is efficiently using its fixed assets to generate revenues while a low ratio shows that the fixed assets of the company do not help generate revenue efficiently.
Sales to Fixed Assets Ratio Formula
$$\text{Sales to Fixed Assets} = \dfrac{Net\: Sales}{Average\: Fixed\: Assets}$$
To get net sales you subtract returns, discounts and sales allowances from the gross sales. Average fixed assets is calculated by adding the beginning and ending fixed assets balance and dividing by two:
$$Average\: Fixed\: Assets = \dfrac{Beginning\: Balance + Ending\: Balance}{2}$$
All this information required to sales to fixed assets ratio is available from the company’s balance sheet and income statement.
If there is accumulated depreciation of the fixed assets, this can also be deducted from the average fixed assets value.
Sales to Fixed Assets Ratio Example
Mr. Zakam, a businessman in Canada, wanted to invest in a profit-generating company. In the process of searching for a good company, he came across financial statements from BGT Company Limited and extracted the information below.
| (in thousands) | 2016 | 2017 | 2018 |
|---|---|---|---|
| Annualized net sales | $15,000 | $24,000 | $35,000 |
| Opening fixed assets | $4,000 | $6,000 | $8,000 |
| Closing fixed assets | $6,000 | $8,000 | $8,000 |
| Accumulated Depreciation | $2,000 | $3,000 | $3,000 |
| Averaged fixed assets – depreciation | $3,000 | $4,000 | $5,000 |
Mr Zakam has hired you as an expert in the field to find out whether the management of BGT Company Limited is doing a good job in running the business. Calculate the sales to fixed assets ratio and advise him appropriately.
$$2016 = \dfrac{15{,}000}{3{,}000} = 5$$
$$2017 = \dfrac{24{,}000}{4{,}000} = 6$$
$$2018 = \dfrac{35{,}000}{5{,}000} = 7$$
The company’s sales to fixed asset ratio have increased from 5 to 7 over the three years. This indicates an efficient use of the company’s fixed assets to generate revenues. For instance, in the year 2018, the company had a sales to fixed assets ratio of 7 and this means that it was generating $7 of revenue for every one dollar of fixed asset investment which is considered a good return.
Sales to Fixed Assets Ratio Analysis
Sales to fixed asset ratio is an asset utilization measure that allows investors to understand how well a company uses its assets to generate revenue. This ratio shows how many times the company’s fixed assets are turned over in a year. Individuals will always be willing to invest in an industry with a high ratio as it implies that high sales revenue is generated per unit dollar of fixed asset investment. Creditors, on the other hand, use this ratio to assess the capability of a company to repay its debts.
A high ratio is an indicator of efficient utilization of fixed assets to generate larger amounts of sales revenue. Meanwhile, a low ratio implies that the company is not efficiently utilizing its fixed assets to revenue generation. Or it can also be interpreted that the product the company is manufacturing is not in demand, so the investment in the fixed assets may not yield positive results
The high ratio does not mean high-profit margins because it only factors in fixed assets and leaves out other key variables in the production process. So users of this ratio should be mindful when giving an interpretation of the figures.
Fixed assets vary from company to company within the same industry because they tend to adapt to different business models. Therefore, the company may follow the asset-light model while the other one follows the asset-intensive model, but they are operating in the same industry. Due to this, the best way is to compare the company’s current performance against past ratios. If you do compare against other companies, look for similar capital requirements. In either case, a ratio higher than the industry’s average is desirable
Sales to Fixed Assets Ratio Conclusion
- Sales to fixed assets refers to a metric used to gauge how well a company utilizes its fixed assets to support a given level of sales
- The sales to fixed asset ratio is interpreted as the amount of net sales revenue generated by investing one dollar of the fixed asset.
- A high ratio is an indicator of efficient utilization of fixed assets to generate larger amounts of sales revenue
- Low ratio implies that the company is not efficiently utilizing its fixed assets to revenue generation
- This formula requires three variables: Annualized Net sales, average fixed assets, and the accumulated depreciation.
- Sales to fixed assets should be tracked over a couple of years to find the trends.
Sales to Fixed Assets Ratio Calculator
You can use the sales to fixed asset ratio calculator below to quickly calculate the amount of net sales revenue generated by investing one dollar of fixed assets by entering the required numbers.