The definition of Fixed asset turn over?
the ratio that calculated the returns which an investor will gain from property, plant or any equipment he purchases for the company is called fixed asset turnover. In short, you can say that it is the calculation done to see how a company is giving you profit by producing sales with its machines and all types of equipment.
This formula is mainly used by the investors and the creditors, they try to understand that how the investment that has done in the company is utilizing the company is giving results to them in profit. This is an important calculation for every investor as this is the formula that will let them know that they will receive in return for their investment. Where on one hand the investors want to see their company earn more profit, on the other hand, there are the creditors who want to make sure that the company is earning enough to repay the loan taken by the company.
Mostly the management has an insider who gives then the complete information about the sales and equipment purchases include each and every detail required for the calculation of profit, so they rarely use this formula. They calculate their returns on more specific information from the purchase and sale departments.
What is the formula to calculate Fixed asset turnover/
This formula is very easy to understand, it is calculated by dividing the net sales by the total property, plant, and equipment.
Fixed Asset Turnover = Net Sales / Fixed Asset – Accumulated Depreciation
The net asset value is always used by subtracting the accumulated depreciation from the gross. It is necessary that the calculation is done by an average net figure of the asset for the denominator as in companies equipment are often purchased and sold, then by adding the beginning balance to the ending balance and dividing by two.
Analysis of Fixed asset turnover
How can you know a good asset turnover?
The turn over says it all, the high turn over will indicate that the assets are being used properly and efficiently, and also that a large amount of sale is generated by the small asset. It can also mean that the company has started to outsource for the operations instead of using self types of equipment, the plus point here is that the outsource maintains the sales as it is by the investment in the equipment is skipped.
Whereas a low turnover will say it all that the company is not utilizing the assets completely.this may be a result of many factors or reason. May by the company is producing products that are not in demand, in this case, it means that they have over-invested in the product production and the types of equipment. The other reason could be because of some manufacturing problems or maybe a stop in manufacturing during the year because of some reason.
There are many factors to be considered while calculating the performance of a company always remember.