The fixed asset turnover (FAT) ratio measures how well a company generates sales using the fixed assets on its balance sheet. FAT ratios vary widely between industries. For some companies and sectors, the FAT ratio provides little utility.
The fixed asset turnover (FAT) ratio is as follows:
FAT = Net Sales / Average Fixed Assets
Net sales and average fixed assets are calculated as follows:
Net Sales = Gross sales – Returns & Allowances
Average Fixed Assets = [(Beginning of Period Net Fixed Assets + End of Period Net Fixed Assets) / 2]
Example Fixed Asset Turnover (FAT) Calculation
Company A wants to measure its fixed asset turnover ratio for the first half of the 2023 fiscal year (January 1, 2023 to June 30, 2023). Company A’s relevant balance sheet and income statement figures are the following:
- Total gross sales are $1,500,000, and returns & allowances are $15,000.
- On December 31, 2022, gross Property, Plant & Equipment (PPE) of $175,000 with accumulated depreciation of $15,000.
- On June 30, 2023, gross PPE of $175,000 with accumulated depreciation of $22,500.
Company A’s calculations are the following:
Net Sales = 1,500,000 – 15,000
Net Sales = $1,485,000
Average Fixed Assets = [(175,000 – 15,000) + (175,000 – 27,500)] / 2
Average Fixed Assets = $153,750
FTA = 1,485,000 / 153,750
FTA = 9.658
Company A’s fixed asset turnover is 9.7 for the first half of 2023.
Things to Remember
Generally, a higher FAT ratio is better because it means a company generates more sales with fewer fixed assets. However, some companies are in a sector where fixed assets are not directly correlated or responsible for generating sales. For example, a consulting business relies on human capital to generate revenue rather than fixed assets, so the FAT metric for a consulting business is almost meaningless.