This indicates an efficient use of the company’s fixed assets to generate revenues. The company’s sales to fixed asset ratio have increased from 5 to 7 over the three years. Calculate the sales to fixed assets ratio and advise him appropriately. 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. In the process of searching for a good company, he came across financial statements from BGT Company Limited and extracted the information below. Zakam, a businessman in Canada, wanted to invest in a profit-generating company. If there is accumulated depreciation of the fixed assets, this can also be deducted from the average fixed assets value. Average fixed assets is calculated by adding the beginning and ending fixed assets balance and dividing by two:Īll this information required to sales to fixed assets ratio is available from the company’s balance sheet and income statement. To get net sales you subtract returns, discounts and sales allowances from the gross sales. 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. Whenever possible, the analyst-investor should avoid using a consolidated balance sheet if certain segments of a company are more capital intensive than others. 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. 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. 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. In the company’s balance sheet, these assets are grouped as property, plant, and equipment.

These fixed assets are always in the form of land, buildings, machinery and other equipment. 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. 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.

Fixed asset turnover ratio formula