5/16/2023 0 Comments Asset turnover ratioHowever, in the current article, instead of focusing on the simple interpretation of the investment required to generate the sales, we would focus more on the other key influences that the net fixed asset turnover has on the business dynamics of the company. She would find companies with net fixed asset turnover of less than one as well as the companies with net fixed asset turnover of more than 10.Ī Net Fixed Assets Turnover Ratio of 1 indicates that every incremental investment of ₹1 by a company in its plants and machinery would increase its sales by ₹1. In their analysis, an investor would come across companies having a wide range of net fixed asset turnover. NFAT = Sales / Average of Net fixed assets at the start of the year and at the end of the year We calculate Net Fixed Asset Turnover Ratio (NFAT) as: We prefer to use Net Fixed Asset Turnover Ratio in our analysis because it indicates the usage pattern of operative productive assets like plants and machinery after factoring in the wear & tear (depreciation) and excludes assets held in form of investments in third parties, cash etc. Most common of these asset turnover ratios are: Investors use different asset turnover ratios to assess the efficiency of capital deployment by a company. We have attempted to provide real-life examples for each scenario so that readers may correlate these learnings with actual life situations.īefore we proceed further, let us first understand different types of asset turnover ratio that investors use to assess the efficiency of utilization of capital by companies. Therefore, in the current article, we have tried to explain how asset turnover influences the dynamics of the business of the company along with its competitive intensity. Moreover, if the asset turnover is lower, then the company faces the risk of entering a debt-trap and a possibility of bankruptcy. During our analysis of companies, we could notice that when asset turnover is above a certain level, then the business becomes highly competitive. The current article is our attempt to share our learning from the analysis of hundreds of companies and understanding their businesses where we could correlate different aspects of their business with their asset turnover. This is an especially critical parameter for companies that have a low asset turnover and as a result, are highly capital intensive. These secondary consequences primarily relate to the nature of competition that the company would face due to the ease or the difficulty of competitors to enter the business depending on the amount of capital needed to start and run the business.Īnother important consequence of asset turnover is the continuous requirement by the business for additional capital for growth. However, apart from a simple interpretation of the amount of investment needed to generate sales, an investor should focus on other secondary consequences of asset turnover (capital intensiveness). Whereas the companies with a higher asset turnover would need to invest a lower amount of money in their assets to generate sales. It means that the companies with a low asset turnover would need to invest a higher amount of money in their assets to generate sales. Effectively, an asset turnover ratio intimates an investor the amount of sales that a company can generate from an investment of ₹1 in its assets.Ī company with a high asset turnover indicates can generate a higher amount of sales from the same investment in its assets than a company with low asset turnover.Īsset turnover is also a representative of capital-intensiveness of the business of the company. It is defined as a ratio of sales and assets. Asset turnover ratio represents the efficiency with which a company is able to use investments in its assets.
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