At a commercial or business level, formulas and other tools are normally used to evaluate the financial situation of a company. For example, using accounting reports , data analysis or evaluating the turnover rate of fixed assets of a company.
In this article we will talk specifically about What is the fixed asset turnover ratio? and How is this index calculated? as well as other elements that you need to have all the information.
What is the fixed asset turnover ratio?
The asset turnover ratio is a financial parameter, which allows a company to measure the percentage of reintegration generated by net assets. As a general rule, this meter is defined by percentage and is one of the tools most used by investors and entrepreneurs.
The advantage that exists in this indicator is that it is not very difficult to calculate or interpret, for those who may not know it. On the other hand, when a company or institution uses its assets properly , it will achieve a high rate of asset turnover.
How is the percentage of Fixed Assets calculated?
Before understanding how these percentages are calculated, it is important to take into account two key factors, because otherwise the index could not be taken.
- Net sales amount: In other words, it is the sum of the set of income that a company has generated in its commercial activity, removing withholdings and discounts for the year.
- Net fixed assets: That is, the amount of the value of all appreciable or palpable assets as well as intangible assets or those that are not physically visible of the company less depreciation of annual expenses .
Finally, by having these accounting data, you will be able to obtain the evaluation of the Asset Turnover index, dividing the value of net sales by net fixed asset value.
- Formula: Asset Turnover = Net Sales / Net Fixed Assets
Use of the fixed asset turnover ratio
Large companies are the ones that mostly use this formula, since they generally make higher investment movements in their manufacturing equipment. Management strives to use the index to ensure that equipment is used appropriately, at its most practical limits.
In this way , the company’s rate can be compared to those of other companies that are competencies, thus defining who is making the best use of the equipment.
Those interested in the fixed asset index
The fixed asset index or rate is recorded internally as well as externally, in this field they would be the administrators and the board of directors. These last two check and guarantee a correct balance of space for equipment and plants throughout the company or company.
On the other hand, commercial banks together with creditors analyze fixed assets and make this produce the income to be able to pay off loans and interest. Financiers are interested in the rate to ensure that the company invests effectively and that it is profitable for fixed assets.
What is a declining index?
While a high fixed asset index indicates a stable income inflow and is generating a rate of economic improvement. However, a declining rate can consist of two aspects: first that sales are declining and two that equipment purchases are outpacing the profit they generate .
If the volume of the business or sale falls, managers must quickly ascertain whether business activities can support the investment of assets . So if machinery purchases increase, the problem may be that too much is spent, or that sales gain ground with the new equipment.
