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Fixed Asset Turnover

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A fixed asset turnover rate is a financial activity ratio which measures the profitability of a firm based on the way it is utilizing its fixed capital assets to generate income. It calculates revenue earned per dollar spent on fixed assets by the firm. The best assets are those that can easily be turned into cash flow and/or capital stock. A low ratio means that a firm is not maximizing its profits but instead is losing money on the investments made.

Fixed asset management ratios are used primarily to set firm-specific investment objectives, plan for retirement, and make decisions about short selling securities. They are also used to determine whether the firm should issue equity or retained earnings. The total value of the firm’s fixed assets is the product of all fixed assets plus its variable assets, less cash and accounts receivable. Allocating assets between the income producing and non-income producing categories helps determine the Firm Expense Ratio, or FER, which is the ratio of net operating profit to total assets.

The value of a firm’s fixed resources, like plant and equipment, can only be determined after all fixed capital expenses have been deducted. Fixed assets may also include fixed capital plus retained earnings and depreciated value. The difference between net worth attributable to tangible fixed assets is net worth attributable to equity. Equity may represent proprietors’ equity plus retained earnings, or owners’ equity plus preferred equity plus retained earnings. Fixed assets may consist of fixed capital, fixed earnings, and fixed asset-liability bonds, common stock, preferred stock, treasury stock, and mortgage notes.

The total revenue of the firm, including all sources of revenue, including the gross domestic product, investment in fixed assets, and net worth, is referred to as the firm’s Net Revenue Flow. Asset turnover occurs when a firm disposes of one or more of its fixed or non-fixed assets, or when it liquidates its equity and assets. While some firms have small and simple operations that do not require a large number of fixed assets, other firms have intricate and complex operations that require substantial fixed asset turnover. A firm’s Net Revenue Flow can help a manager to determine whether to retain existing fixed capital or to reposition or reallocate existing assets in order to minimize the firm’s fixed asset turnover.

Fixed asset turnover can be measured using several different methods. One method of calculating turnover is to calculate one-time costs, such as the cost of purchasing fixed assets, and compare these to the present value of the firm’s net assets, i.e., its net worth per unit increased or decreased by the cost of the asset. Another method of calculating turnover is to determine the cost basis of fixed capital, which is calculated by subtracting the gross value of the asset from the current fair market value of the firm’s total fixed capital. The third method of calculating turnover is to determine the cost basis of intangible fixed assets, which includes the cost of depreciating or improving the value of an intangible asset.

If the total amount of fixed assets is negative, the manager can choose to reallocate some of the fixed capital to reduce the cost of fixed assets for inventory, plant, and equipment, or to create new plant, equipment, and inventory. Reallocating fixed assets will decrease the total cost of operating the firm, and will also increase cash flow and profits. On the other hand, if the total amount of assets is positive, the manager can reduce the cost of fixed capital to increase cash flow and profits. Changes in inventory mix will improve the profitability of any firm. Similarly, changing plant and equipment stocks will help minimize fixed capital expenditures and improve the profitability of any firm.

A firm can allocate part of its fixed capital to tangible assets and part of its fixed capital to equities in fixed assets, depending on its preferences. If an enterprise has fixed capital that it desires to increase, it can increase its fixed earnings by converting part of the fixed capital into equity. Likewise, if part of the fixed capital is to be used as reserves for the creation of new business, then the enterprise can decrease the cost of reserves by converting a portion of the retained cost basis into equity. On the other hand, if the part of fixed capital that is not required to create new jobs is increased, then this surplus amount can be used to increase the cash flow of the enterprise.

Fixed asset turnover is a process that can occur when the assets of an enterprise are changed from one owner to another, when one director becomes interested in another area of the business, or when another firm controls a substantial portion of the firm. Fixed assets are those that can be turned over without having to go through the process of re-entering the existing contracts. In order to attract new tenants, it may be necessary to sell fixed assets such as real estate, franchises, and investments. Fixed assets turnover is a vital process for businesses looking to attract new tenants and to reduce operating expenses. This process can also help to improve the profitability of an already existing firm by reducing costs.


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