Fixed Asset Turnover

The Fixed Asset Turnover (FAT) ratio is a measure used in financial analysis to assess a company’s effectiveness in using its fixed assets, such as property, plant, and equipment, to generate sales. It is a type of efficiency ratio that indicates how well a company uses its fixed assets to generate revenue.

The ratio is calculated by dividing net sales by the net book value of fixed assets. Here’s the formula:

Fixed Asset Turnover = Net Sales / Average Net Fixed Assets

The net sales are found on the company’s income statement, and the average net fixed assets are calculated by adding the beginning and ending net book value of fixed assets for the period and dividing by two.

A high ratio may indicate that the company is effective at using its fixed assets to generate sales, while a low ratio may suggest that the company has invested heavily in fixed assets without a proportional increase in sales. However, it’s important to compare the ratio to industry averages and competitor companies as a high or low FAT ratio can be industry-specific.

As with any financial ratio, it’s only one piece of the overall financial picture and should be used in conjunction with other metrics and information.