The fixed assets turnover rate is another activity ratio whereby an income statement financial characteristic is compared to a balance sheet asset section. In this case, comparing adjusted sales against historical cost of fixed assets. This financial business ratio<\/span><\/strong><\/a> is only effective for business operations that are fixed assets<\/span><\/strong><\/a> intensive. With service based industries like carpet cleaning, professional firms and medical practices this particular ratio is impractical. It is designed for operations that rely heavily on equipment to account for production and ultimately the corresponding sales. This includes the following industries:<\/span><\/p>\n * Shipping (ships, trains, trucking)<\/span> Retail and construction are not good candidates for this particular ratio as there is a high reliance on material (inventory) and labor to account for the respective sale.<\/span><\/p>\n As with other activity ratios, the higher the value the more leverage is exercised and the more likely the ratio indicates success. To understand this particular ratio, this chapter will first cover the two elements that make up the ratio’s formula. Next, it will further clarify its concept then its application in business. Along the way, this chapter will identify flaws and misapplication. Once completed, the reader will be well versed in its proper interpretation and use with business.<\/span><\/p>\n The textbook formula is:<\/span><\/p>\n Fixed Assets Turnover Rate = Sales<\/span><\/span> In reality, the formula must be more refined in order to get any real discernible information or value from the results. Many businesses break the company’s revenue into function sources for the respective sales. For example there is a big difference between a sale generated as a function of inventory (inventory turnover rate<\/span><\/strong><\/a>) and a sale as a result of using equipment. To illustrate, this electrician separates his sales via departmental accounting based on inventory, service and equipment.<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0S & B ELECTRIC \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Parts<\/u>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0Service<\/u>\u00a0 \u00a0Equipment<\/u>\u00a0 \u00a0 \u00a0Total His equipment department consists of two lift bucket trucks and a trencher generating sales from light pole maintenance and repairs along with setting underground wiring (trenching). He uses item tracking with his invoicing to separate out parts, service and equipment.<\/span><\/p>\n Notice in the above revenue report there are three lines of information related to sales: 1) gross, 2) adjusted and 3) net. The proper line to use with the fixed asset turnover rate formula (equation) is net sales related to equipment, i.e. $87,893.<\/span><\/p>\n If the reader uses any other sales data point, the formula’s design significantly impacts the resulting value. Take a look at this table for illustration assuming $100,000 of historical cost for the equipment.<\/span><\/p>\n \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 S & B ELECTRIC * Assumes $100,000 of Costs for Equipment<\/span><\/p>\n Which answer is the best? The correct ratio is\u00a0 .879, net sales related to equipment only. The use of gross sales generates a higher ratio and although very close in value; the .016 difference does become significant if the equipment dollar value in the equation decreases. Try it; change the equipment dollar value to $70,000 and notice the difference.<\/span><\/p>\n It is important for the reader to understand why net sales is used as the numerator in activity ratios instead of gross or adjusted sales.<\/span><\/p>\n First off it is much more accurate.<\/span><\/p>\n Secondly, many industries have large percentage differences between total gross sales and net sales. For example, in residential construction, the\u00a0 adjustments for returns and allowances often approach 8 and 9% of contract values. In medicine, adjustments can reach as much as 48% on the dollar.<\/span><\/p>\n It is essential to use the correct figure when calculating the fixed asset turnover rate or for that matter, any business ratio.<\/span><\/p>\n The concept of using the correct value also applies to the fixed asset value. Do you use cost basis, tax basis or historical costs?<\/span><\/p>\n Accountants use a weird concept called depreciation. This accounting principle<\/span><\/strong><\/a> allocates to expense the original cost of the fixed asset over the expected life of the asset. Therefore the cost basis (historical purchase price less depreciation) changes from one accounting period to the next. It wouldn’t make a difference between cost or historical basis purchase price with the formula contingent that: A) depreciation is fairly applied from one accounting cycle to the next and B) there is consistency in application for all fixed assets. The reality is that there are several different forms of depreciation (GAAP, accelerated, tax, and Section 179) used for individual and asset groups. In addition, no two companies use the same depreciation amounts each year.\u00a0 Furthermore, since cost basis is constantly decreasing from one period to the next, the resulting turn ratio is constantly increasing. Look at this example for S&B assuming depreciation of the fixed assets at 20% per year.<\/span><\/p>\n S&B Electric – Fixed Assets Turnover Rate (Yearly)<\/strong><\/span> The results are more misinformative than valuable to the reader. The actual physical assets didn’t change; only the dollar value in the denominator changed. The formula’s results in 2017 are 3 times better than 2015 with the same sales volume. The formula’s goal is to identify the ability of management to leverage (efficiently use) fixed assets. The higher the rate, the better the ability to leverage the asset(s).<\/span><\/p>\n The better formula is as follows:<\/span><\/p>\n Fixed Assets Turnover Rate = Net Sales from Fixed Assets Utilization The primary purpose of this formula is to evaluate the ability of management to utilize fixed assets to generate value via sales for the company. Let’s think about this concept for a moment. Only equipment intensive business operations should use this tool as other business sectors rely on other forms of assets to generate sales. Here is a list of industries and their corresponding assets that generate sales.<\/span><\/p>\n Industry<\/u><\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Assets<\/u><\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Explanation<\/u><\/strong><\/span><\/p>\n Retail<\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Inventory\u00a0 \u00a0 \u00a0The retail industry’s sale is mostly tied to inventory to produce the corresponding transaction. Retail has low fixed dollar value of fixed assets as a percentage of total assets.<\/span><\/p>\n Professional Services<\/strong> None\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Knowledge exists within the professional staff. Although technology and software are essential, in the overall scheme of the sale, the customer is buying brain power and experience.<\/span><\/p>\n Services<\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Labor\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Very similar to professional services, the customer is buying human muscle. Fixed assets have little to no value with sales.<\/span><\/p>\n Food Service<\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Food\/Labor\u00a0 Although a bit more equipment intensive than traditional services or retail, the fixed asset component of the transaction makes up only 20% of the value sold. Food and labor are the prime forces of the economic transaction.<\/span><\/p>\n Construction<\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Materials\u00a0 \u00a0 \u00a0 Construction is mostly combining raw materials with the talent to build something. Fixed assets are used to expedite the process, but have very little bearing on the final price.<\/span><\/p>\n As industries shift towards a greater reliance on equipment to produce a product or render a service, the fixed asset turnover rate becomes an essential ratio for analysis. In general, as fixed assets tend towards more than 50% of the final sales price, the ratio becomes more important. Take a look at these industries.<\/span><\/p>\n Manufacturing <\/strong>– The equipment used to process or make the product are instrumental in determining the final sales price. For example, the manufacture of paper towels is more reliant on the various processes and equipment than the raw resource used to make paper towels. This is true with most non-food consumer goods.<\/span><\/p>\n Utilities – <\/strong>Imagine the historical cost basis to build the entire electrical power generation system and its corresponding electrical distribution system. The cost of the raw energy is a very low percentage of the net sales price to the consumer. This is also true with all utilities: water, sewage treatment, natural gas and so on.<\/span><\/p>\n Transportation – <\/strong>When most people think of trains, they envision a single locomotive pulling a few rail cars. The reality is starkly different. Not only is a locomotive pulling rail cars, it is pulling over 100 cars on a track that goes on for miles. There is real estate involved, engineering of the system, safety mechanisms, all with just one engineer operating the main engine. The fixed asset aspect of the shipping charge is well over 80% of the value priced in the fees to customers. This is true with cargo ships, terminals and airlines. It is somewhat less with traditional long haul trucking as the labor component picks up 25 to 40% of the value associated with the final cost to the customer.<\/span><\/p>\n Real Estate – <\/strong>This particular industry has a high reliance on fixed assets as the underlying cost driver<\/strong><\/a> for rents charged to the tenant. Granted other costs drive the rent including taxes, insurance and maintenance; but the actual building is the core element of the basis for rent charged<\/span>.<\/span><\/p>\n
\n * Site Developers<\/span>
\n * Crane Operations<\/span>
\n * Marinas and Marine Construction<\/span>
\n * Real Estate Rentals<\/span>
\n * Resorts<\/span>
\n * Transportation<\/span><\/strong><\/a> ( haulers,\u00a0 taxicabs,\u00a0 ferries, cruise ships)<\/span>
\n * Golf Courses<\/span>
\n * Mining and Drilling (oil, water,\u00a0 natural gas)<\/span><\/p>\nFixed Assets Turnover Rate Formula<\/span><\/strong><\/h2>\n
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Fixed Assets<\/span><\/p>\n
\n<\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Departmental Revenue Statement (Limited Scope)<\/strong><\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0For the Month Ending September 30, 2016<\/strong><\/span>
\n<\/u><\/p>\n
\n<\/u>Gross Sales\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $47,304\u00a0 \u00a0 \u00a0 $207,647\u00a0 $89,493\u00a0 \u00a0 \u00a0 $344,444<\/span>
\n Discounts\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0(707)<\/u>\u00a0 \u00a0 \u00a0\u00a0 \u00a0 (2,980)<\/span>\u00a0 \u00a0 \u00a0 \u00a0-0-\u00a0<\/u>\u00a0 \u00a0 \u00a0 \u00a0\u00a0 \u00a0 \u00a0(3,687)<\/span><\/span>
\n Adjusted Gross Sales\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 46,597\u00a0 \u00a0 \u00a0 \u00a0204,667\u00a0 \u00a0 89,493\u00a0 \u00a0 \u00a0 \u00a0 340,757<\/span>
\n Less:<\/span>
\n – Returns\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0(207)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -0-\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -0-\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 (207)<\/span>
\n – Allowances\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 -0-<\/u>\u00a0 \u00a0 \u00a0 \u00a0\u00a0 \u00a0(3,402)<\/span>\u00a0 \u00a0 \u00a0(1,600)<\/span>\u00a0 \u00a0 \u00a0 \u00a0\u00a0 (5,002)<\/span><\/span>
\n Net Sales\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0$46,390\u00a0 \u00a0 \u00a0$201,265\u00a0 \u00a0 $87,893\u00a0 \u00a0 \u00a0 \u00a0335,548<\/span>
\n Other Revenue\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0 \u00a0 3,618<\/span><\/span>
\n Total Revenue\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $339,166<\/span><\/p>\n
\n<\/strong>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 Fixed Asset Turnover Rate Results<\/strong><\/span>
\n\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Various Sales Data Points
\nData Point\u00a0<\/span> \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 $Sales Value<\/span>\u00a0 \u00a0Fixed Asset Turnover Rate*
\n<\/span><\/strong>Gross Sales\u00a0\u00a0\u00a0\u00a0 (All)\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 $344,444\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3.444:1<\/span>
\n Gross Sales\u00a0\u00a0\u00a0\u00a0 (Equipment)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 89,493\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 .895:1<\/span>
\n Adjusted Sales\u00a0\u00a0\u00a0\u00a0\u00a0 (All)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0340,757\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3.408:1<\/span>
\n Net Sales\u00a0\u00a0\u00a0\u00a0 (All)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0335,548\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3.355:1<\/span>
\n Net Sales (Equipment)\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a087,893\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0.879:1
\n<\/strong>Total Revenue\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 339,166\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 3.392:1<\/span><\/p>\n
\n Sales Volume = $650,000 from equipment fees (invoices)\u00a0 \u00a0 \u00a0\u00a0<\/strong>
\n<\/u>\u00a0Year<\/span>\u00a0 \u00a0 \u00a0 \u00a0\u00a0Cost Basis<\/u>\u00a0 \u00a0 \u00a0Formula\u00a0<\/u> \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a0Fixed Asset Turnover Rate
\n<\/u>2013\u00a0 \u00a0 \u00a0 $100,000\u00a0 \u00a0 \u00a0\u00a0$650,000\/$100,000\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0\u00a06.5:1<\/span>
\n 2014\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 80,000\u00a0 \u00a0 \u00a0\u00a0$650,000\/$80,000\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 8.125:1<\/span>
\n 2015\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 60,000\u00a0 \u00a0 \u00a0\u00a0$650,000\/$60,000\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 10.833:1<\/span>
\n 2016\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 40,000\u00a0 \u00a0 \u00a0\u00a0$650,000\/$40,000\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 16.25:1<\/span>
\n 2017\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 20,000\u00a0 \u00a0 \u00a0\u00a0$650,000\/$20,000\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 32.50:1<\/span><\/p>\n
\n<\/u>\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0Historical Cost Basis of the Same Fixed Assets<\/span><\/p>\nFixed Assets Turnover Rate Analysis<\/span><\/strong><\/h2>\n
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