The fixed asset turnover ratio measures the company's effectiveness in generating sales from its investments in plant, property, and equipment. It is especially important for a manufacturing firm that uses a lot of plant and equipment in its operations to calculate this ratio.
Here is how the fixed asset turnover ratio is calculated:
Net Sales/Net Plant and Equipment (Net Fixed Assets) = X Times
The denominator in the equation should be net of accumulated depreciation.
Interpretation: If the fixed asset turnover ratio is low as compared to the industry or past years of data for the firm, it means that sales are low or the investment in plant and equipment is too high. This may not be a serious problem if the company has just made an investment in fixed asset to modernize, for example.
If the fixed asset turnover ratio is too high, then the business firm is likely operating over capacity and needs to either increase its asset base (plant, property, equipment) to support its sales or reduce its capacity.