Definition:

Fixed Asset Turnover is a financial ratio that measures how efficiently a company uses its fixed assets to generate sales revenue.

Formula:

Fixed Asset Turnover = Net Sales / Average Net Fixed Assets

How to use the metric:

This metric is used to assess a company's efficiency in utilizing its fixed assets, such as property, plant, and equipment, to produce sales. A higher ratio indicates more efficient use of fixed assets.

Limitations:

Fixed Asset Turnover does not account for the age or condition of the assets, which can affect productivity. It may also not be comparable across industries with different capital intensities.

Applies to:

This metric works best in capital-intensive industries such as manufacturing, utilities, and telecommunications, where significant investments in fixed assets are common.

Doesn't apply to:

It does not apply well to service-based industries or technology companies, where intangible assets and intellectual property are more significant than fixed assets.

Summary:

Fixed Asset Turnover is a useful measure of how effectively a company uses its fixed assets to generate sales, particularly in capital-intensive industries. However, it has limitations in comparing companies across different industries and does not consider asset age or condition.