How efficiently a business uses fixed assets to generate sales

**What is Fixed Asset Turnover?**

Fixed Asset Turnover (FAT) is an efficiency ratio that indicates how well or efficiently a business uses fixed assets to generate sales. This ratio divides net sales by net fixed assets, calculated over an annual period.

The net fixed assets include the amount of property, plant, and equipment, less the accumulated depreciation. Generally, a higher fixed asset ratio implies more effective utilisation of investments in fixed assets to generate revenue. This ratio is often analysed alongside leverage and profitability ratios.

### Fixed Asset Turnover Ratio Formula

To determine the Fixed Asset Turnover ratio, the following formula is used:

**Fixed Asset Turnover = Net Sales / Average Fixed Assets**

### Example Calculation

Fisher Company has annual gross sales of $10M in the year 2015, with sales returns and allowances of $10,000. Its net fixed assetsâ€™ beginning balance was $1M, while the year-end balance amounts to $1.1M. Based on the given figures, the fixed asset turnover ratio for the year is 9.51, meaning that for every one dollar invested in fixed assets, a return of almost ten dollars is earned.

The average net fixed asset figure is calculated by adding the beginning and ending balances, then dividing that number by 2.

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