FAT which means Fixed Asset Turnover Ratio is generally used for measuring the operating performance by the analysts. This is where the efficiency ratio is used to compare the income statement that is the net sales to the balance sheet that is fixed assets. Then measure that company’s or firm’s ability to generate net sales. This net sale is the one from the investments, property pant and also the types of equipment, it is also known as PP&E.
If you see a higher FAT of the company then that company has used the investments t generate sales. The accumulated depreciation is calculated with the help of fixed asset balance.
In simple words
- The FAT that is the Fixed asset Turnover Ratio simply helps us know how efficient is the company in generating sales with the existing fixed assets.
- If the ratio is higher then it simply means that the fixed assets are used very well.
- The solid profits and cash flows have nothing to do with the higher Fixed Asset Turnover Ratio.
Let’s see the Fixed Asset Turnover Ratio Formula
Average Fixed Assets
Here Net Sales means Gross Sale, fewer returns and allowances
NABB – Ending Balance
Here NABB means Net Fixed Assets Beginning Balance
This is most commonly used in the manufacturing industries. These are those industries that purchase PP&E just to increase their output. In these cases, the investors keep an eye on the ratio for some years to see whether this new purchase gives some rewards by increasing sales or not.
The complete investments in fixed assets simply represent the company’s total assets. The FAT ratio is normally calculated only annually. It is to see how efficient is the company. You can say it is to see the efficiency of the company’s management team that used the assets to only generate profit by sales.
Interpreting the FAT
The higher turnover simply means that efficiency is very good for managing the fixed assets and their investments. But remember that there is nothing accurate about the numbers that will give you the exact range of the numbers that are efficient in generating or increasing sales. For this, the analysts should compare the company’s recent ratio to the historical ratios and the values of the peer companies and even the average ratio of the firm. You must also remember that the fixed assets vary from company to company.
Fixed Asset Turnover Ratio and Asset Turn Over Ratio
In Asset turnover ration the focus is on the complete assets but in Fixed Asset Turn Over only the fixed assets are the main part of the calculation.
Using FAT limitations
Many companies have worse ratios at times so this should be looked from time to time to keep a track. Even the companies that have high turnover can also lose money, the reason could be the sales generated by fixed assets that generate good profit and healthy cash flow.