![]() Accelerated DepreciationĪ potential problem with this ratio may arise if a company uses accelerated depreciation, such as the double declining balance method, since this artificially reduces the amount of net fixed assets in the denominator of the calculation and makes turnover appear higher than it really should be. In other industries, such as software development, the fixed asset investment is so meager that the ratio is not of much use. The fixed asset turnover ratio is most useful in a "heavy industry," such as automobile manufacturing, where a large capital investment is required in order to do business. Several cautions regarding the use of this measurement are noted below. = 3.0 Turnover per year Problems with the Fixed Asset Turnover Ratio The calculation of ABC's fixed asset turnover ratio is: Sales over the last 12 months totaled $9,000,000. Net annual sales ÷ (Gross fixed assets - Accumulated depreciation) = Fixed asset turnover ratio Example of the Fixed Asset Turnover RatioĪBC Company has gross fixed assets of $5,000,000 and accumulated depreciation of $2,000,000. Do not include intangible assets in the denominator, since it can skew the results. It may be necessary to obtain an average fixed asset figure, if the amount varies significantly over time. The formula for the ratio is to subtract accumulated depreciation from gross fixed assets, and divide that amount into net annual sales. How to Calculate the Fixed Asset Turnover Ratio ![]() A corporate insider has access to more detailed information about the usage of specific fixed assets, and so would be less inclined to employ this ratio. The concept of the fixed asset turnover ratio is most useful to an outside observer, who wants to know how well a business is employing its assets to generate sales. ![]()
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