How to Use Financial Reports to Determine Fixed Assets Turnover
You want to test how efficiently a company uses its fixed assets to generate sales, a ratio in financial reporting known as the fixed assets turnover. Fixed assets are assets that a company holds for business use for more than one year and that aren’t likely to be converted to cash anytime soon.
Fixed assets include items such as buildings, land, manufacturing plants, equipment, and furnishings. Using the fixed assets turnover ratio, you can determine how much per dollar of sales is tied up in buying and maintaining these long-term assets versus how much is tied up in assets that are more quickly used up.
If the economy goes sour and sales drop, reducing variable costs is much easier than reducing costs for maintaining fixed assets. The higher the fixed assets turnover ratio, the more nimble a company can be when responding to economic slowdowns.
How to calculate fixed assets turnover
Here’s the fixed assets turnover ratio formula:
Net sales ÷ Net fixed assets = Fixed assets turnover ratio
You can calculate this ratio by using the net sales figures from Mattel’s and Hasbro’s income statements and the fixed assets figures from their balance sheets. For both companies, use the line item Property, plant, and equipment, net. (If a company doesn’t calculate its fixed assets for you, you have to add several line items together, such as Buildings, tools, and equipment.)
$6,420,881,000 (Net sales) ÷$4,088,983,000 (Net fixed assets) = 10.82 (Fixed assets turnover ratio)
$4,088,983,000 (Net sales) ÷$230,414,000 (Net fixed assets) = 17.75 (Fixed assets turnover ratio)
What do the numbers mean?
A higher fixed assets turnover ratio usually means that a company has less money tied up in fixed assets for each dollar of sales revenue that it generates. If the ratio is declining, it can mean that the company is overinvested in fixed assets, such as plants and equipment. To improve the ratio, the company may need to close some of its plants and/or sell equipment it no longer needs.
You can tell whether a company’s fixed assets turnover ratio is increasing or decreasing by calculating the ratio for several years and comparing the results.
The balance sheet includes two years’ worth of data, so in this example, you may be able to find the financial statements for 2010 online (if not, you can request them). Then you’d have the data for 2012 and 2011 on the 2012 balance sheet, and you’d have the data for 2010 and 2009 on the 2010 balance sheet.