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14. Financial Statement Analysis

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Ratios: Fixed Asset Turnover

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Alright here we go. With more ratios. The fixed asset turnover ratio. So fixed asset turnover ratio. While this is going to relate the amount of net sales to guess what our fixed assets, right? Our average fixed assets. So this is a measure of our efficiency. How well are we using our fixed assets? Okay, so fixed asset turnover. Let's go ahead and look at our formula right here. Just like always we're gonna have a division, our numerator has net sales divided by our average fixed assets. Remember every time we've got an average we're gonna start with our beginning balance, add the ending balance and divide by two. Okay, that's how we always calculate our average balance. So that's let me write that in here. It's always calculated as this beginning balance plus ending balance divided by two. Okay, that's how we calculate that. And remember if they only give you just one number, they don't give you a beginning and ending balance, We'll just use that number. You don't have to calculate an average. Okay, so if they just say fixed assets are 100,000, that will be your denominator. So how do we how do we analyze our fixed asset turnover? Well, what does it tell us? Remember? It's how much of the numerator for each one of the denominator. So how many dollars of sales? How many dollars of sales do we get for each dollar of fixed assets for each dollar of fixed assets. So you can imagine this is gonna be different for different industries right here. The comparison behind me. Well, you can imagine there's industries that have a lot of fixed assets. Again, I've used this example in other videos, the airline industry, right? They're gonna have a lot of fixed assets. A bus company like greyhound busses, they have to have all these busses that cost a ton of money. Um So they're gonna have a lot of fixed assets. Some, some businesses don't have very many fixed assets, so they're gonna have different benchmarks. Different. What would be a good amount for this ratio? Okay, so we gotta use benchmarking, right? We're gonna compare it to our competitors. We're gonna compare it to the industry average and see how we compare their. Okay, so generally, with all turnover ratios, we're gonna see that Generally, a higher ratio means that we are being more efficient with those fixed assets, right. If we can turn a dollar fixed assets into $5 of sales, that's better than turning a dollar fixed assets into $2 sale. Right, So the higher the ratio, the better, Okay, this one's not too complicated. Let's jump into some practice problems right away. Cool. Let's do it now.

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Problem

XYZ Company had net sales of $500,000 and COGS of $320,000. If the beginning balance of Fixed Assets was $300,000 and the ending balance in Fixed Assets was $400,000, what is the Fixed Asset Turnover ratio?

A

0.51

B

1.25

C

1.43

D

1.67

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Problem

ABC Company had $200,000 in Net Sales and Gross Profit of $80,000. If Fixed Assets equaled $400,000, what is the Fixed Asset Turnover ratio?

A

0.2

B

0.5

C

2.0

D

2.5

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