Activity-Based Financial Ratio: Turnover Of Fixed Assets

June 9th, 2006 Comments off
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TURNOVER OF FIXED ASSETS:

FORMULA

Net Sales / Fixed Assets

MEASURE WHAT

Measure the efficiency of the usage of fixed assets in generating sales

SCORE/VALUE

Varies.

The higher is the more effective

SALIENT POINTS TO NOTE

Comparing similar periods and similar industry statistics determines measures of efficiencies by which the assets in this case, fixed assets are employed in the business.

Using this turnover of fixed assets, management might realize that owning big premises or properties might work against the concept of turning faster its assets. Just imagine that two companies, one without a prestigious head office ( big building) and one renting, we can see a complete contrast in its turnover of fixed assets.

This financial ratio might reveal to management that if its core competency is a trading based entity and not as a realty company then it is better off without owning any big land and building.

Besides that, owning big plant and machinery without sufficient sales will worsen the turnover of fixed assets. This might reveal a bad foresight of management in purchasing such fixed assets.

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Financial Accounting

 
 

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