Alright, here we go with more ratios, the fixed asset turnover ratio. So, the fixed asset turnover ratio 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?

Let's go ahead and look at our formula right here. Just like always, we are going to have a division. Our numerator has net sales divided by our average fixed assets. Remember, every time we have an average, we are going to start with our beginning balance, add the ending balance, and divide by 2. That is how we always calculate our average balance, so let me write that in here. It is always calculated as beginning balance, + ending balance 2 , okay?

And remember, if they only give you one number, they don't give you a beginning and ending balance, well, just use that number. You do not have to calculate an average. So, if they say fixed assets are $100,000, that will be your denominator.

So, how do we analyze our fixed asset turnover? Well, what does it tell us? Remember, it is how much of the numerator for each unit of the denominator. So, how many dollars of sales do we get for each dollar of fixed assets? You can imagine this is going to be different for different industries. The comparison behind me, well, you can imagine industries that have a lot of fixed assets. Again, I have used this example in other videos, the airline industry, right? They are going to have a lot of fixed assets. A bus company like Greyhound Buses, they have to have all these buses that cost a ton of money. So they are going to have a lot of fixed assets. Some businesses do not have very many fixed assets, so they are going to have different benchmarks, different amounts that would be good for this ratio.

We have to use benchmarking, right? We are going to compare it to our competitors, we are going to compare it to the industry average and see how we compare there. Generally, with all turnover, a higher ratio means that we are being more efficient with those fixed assets. If we can turn a dollar of fixed assets into $5 of sales, that is better than turning a dollar of fixed assets into $2 of sales, right? The higher the ratio, the better.

This one is not too complicated. Let's jump into some practice problems right away. Cool? Let's do it now.