What Is the Fixed Asset Turnover Ratio (FAT)?
The fixed asset turnover ratio (FAT) measures how efficiently a company uses its fixed assets — principally property, plant, and equipment (PP&E) reported net of accumulated depreciation — to generate net sales. In plain terms, it answers: “How many dollars of sales does the business produce for every dollar invested in fixed assets?”
Source: Investopedia (Crea Taylor)
Key Takeaways
– FAT = Net Sales ÷ Average Fixed Assets (PP&E, net of accumulated depreciation).
– A higher FAT generally indicates more efficient use of fixed assets to produce sales.
– FAT is most useful when compared across time, against peers or industry averages, and when used alongside profitability and cash-flow metrics.
– FAT has important limitations (capital intensity differences across industries, depreciation policies, outsourcing, timing of capex) and should not be used alone to judge financial health.
Fixed Asset Turnover Ratio — Formula and Components
Formula:
FAT = Net Sales / Average Fixed Assets
Definitions:
– Net Sales = Gross sales − returns and allowances (use the period’s net sales figure from the income statement).
– Average Fixed Assets = (Beginning-period PP&E, net of accumulated depreciation + Ending-period PP&E, net of accumulated depreciation) / 2.
Practical calculation steps:
1. Obtain net sales for the period (from the income statement).
2. Obtain beginning and ending fixed assets (PP&E) net of accumulated depreciation from the balance sheet.
3. Compute average fixed assets: (Beginning PP&E + Ending PP&E) / 2.
4. Divide net sales by average fixed assets to get FAT.
5. Interpret the result as “dollars of sales generated per $1 of fixed assets.”
Example (practical)
Using the simplified example from public reporting:
– Beginning fixed assets (net): $160.3 billion
– Ending fixed assets (net): $177.2 billion
– Average fixed assets = (160.3 + 177.2) / 2 = $168.75 billion
– Net sales for the period: $364.8 billion
FAT = 364.8 / 168.75 ≈ 2.16
Interpretation: For every $1 of fixed assets, the company generated about $2.16 in net sales during the period.
Interpreting the Fixed Asset Turnover Ratio
– Higher is generally better: a higher FAT means the business generates more sales from each dollar of PP&E.
– Industry context is critical: capital-intensive industries (manufacturing, utilities, airlines) will typically have much lower FATs than asset-light businesses (software, digital services, some retailers).
– Trends matter: rising FAT over time can signal improving asset utilization or successful new investments; declining FAT may indicate underused assets or overinvestment.
– Complementary metrics: use FAT together with gross margin, operating margin, return on assets (ROA), return on invested capital (ROIC), and cash flow metrics to get a fuller picture.
Fixed Asset Turnover Ratio vs. Asset Turnover Ratio
– Asset turnover uses total assets as the denominator; FAT uses only fixed assets (PP&E net).
– Asset turnover will normally be lower than FAT because total assets >= fixed assets.
– Use FAT when you want to focus on capital expenditures and PP&E efficiency (typical for manufacturing); use asset turnover when examining overall asset efficiency, including working capital and intangible assets.
Limitations and Important Considerations
– Industry differences: FAT varies dramatically by industry. Benchmarks must be industry-specific.
– Depreciation and accounting choices: different depreciation methods, useful lives, and accounting policies alter net PP&E and therefore FAT.
– Timing and capex cycles: FAT is sensitive to when large purchases are recorded relative to sales. New assets may depress FAT until they reach full production.
– Outsourcing and off-balance-sheet choices: outsourcing production or using operating leases/sale-leasebacks can shrink PP&E and raise FAT while not necessarily improving underlying business economics.
– Profitability blind spot: FAT measures revenue generation per asset dollar, not profitability. A high-FAT company can still be unprofitable if costs are high.
– Seasonal and cyclical sales: single-period ratios can be misleading; analyze multiple periods.
– Asset quality and age: older, fully-depreciated assets may inflate FAT (low denominator) even if those assets are less capable.
What Is a Good Fixed Asset Turnover Ratio?
– There is no universal “good” number — it depends on industry norms and company strategy.
– Compare to: (a) the company’s historical FATs to identify trends, (b) direct competitors, and (c) industry averages.
– In general, a FAT higher than peers or the industry average suggests superior asset utilization.
Should the Fixed Asset Turnover Ratio Be High or Low?
– Preferably higher, because it implies more efficient use of fixed assets to generate sales.
– Caveat: unusually high FAT might indicate underinvestment or insufficient capacity (constraining future growth) or artificial boosting via asset sales/outsourcing. A balanced view that considers growth plans and profitability is necessary.
Main Downside to the Fixed Asset Turnover Ratio
The principal limitation is that FAT ignores expenses and profitability. It tells you how much revenue each dollar of fixed assets produces, but not whether those revenues generate a profit or adequate cash flows. Additionally, FAT can be distorted by accounting policies, asset disposals, leasing strategies, and timing of capex.
Practical Steps for Analysts and Managers
For analysts (how to use FAT for evaluation):
1. Calculate FAT consistently for at least 3–5 periods using net sales and average net PP&E.
2. Benchmark against competitors and industry averages.
3. Segment the analysis if possible (by business unit or region) to identify where PP&E is most/least productive.
4. Adjust or annotate for major transactions: acquisitions, major capex projects coming online, asset sales, large impairments.
5. Combine with profitability (gross margin, operating margin), efficiency (inventory turnover), and cash metrics (free cash flow) to form conclusions.
6. Watch for signs of asset underinvestment (rapidly increasing FAT with shrinking net PP&E) or overinvestment (falling FAT despite stable sales).
7. Consider depreciation policies and leasing: normalize comparisons if peers use different accounting (e.g., operating leases previously off-balance-sheet).
For managers (how to improve FAT and use it in decision-making):
1. Improve asset utilization: increase output from existing assets through scheduling, maintenance, and efficiency programs.
2. Rationalize capacity: sell, repurpose, or write off idle or obsolete assets.
3. Consider outsourcing or flexible production arrangements when owning assets is less efficient.
4. Time capex investments strategically: phase in capacity to align with demand so average PP&E growth is justified by revenue growth.
5. Use sale-leaseback or leasing to free up capital if ownership is lowering FAT without strategic benefit (but weigh long-term cost).
6. Monitor capital project ROI: require business cases showing projected improvements in FAT and profitability.
7. Invest in technology/automation that raises throughput per asset dollar.
Using FAT as Part of a Broader Analysis
– Pair with profitability measures (net margin, ROA, ROIC) to assess whether asset efficiency translates to shareholder returns.
– Use cash-flow metrics to verify collection timing differences and actual cash generation from sales.
– When peer data is limited, categorize peers by capital intensity (capital-intensive vs. asset-light) for more meaningful comparisons.
The Bottom Line
The fixed asset turnover ratio is a focused, practical measure of how effectively a company uses its physical capital (PP&E) to generate sales. It’s most useful as a comparative and diagnostic tool — compare across time, peers, and industry averages — and as an input to capital-allocation and operational-improvement decisions. But because FAT omits expenses, profitability, and can be distorted by accounting choices and outsourcing, it should never be used in isolation.
Sources
– Investopedia: “Fixed Asset Turnover (FAT)” — Crea Taylor. (Original content summarized and paraphrased.)
– Company example figures referenced from publicly reported balance sheet and sales data (e.g., Amazon Q3 2022 reporting).
If you’d like, I can:
– calculate FAT for a specific company if you provide its sales and PP&E balances; or
– prepare a side‑by‑side FAT comparison for several peers in a chosen industry.