Question

Discuss when total asset turnover would be more important than fixed asset turnover. Provide an example.

Answer 1

We know that -

Total asset turnover ratio = Net Annual Sales/Average total asset

The total asset turnover ratio calculates net annual sales divided by average total assets and shows that how many sales are generated from each dollar of company’s assets.

Fixed asset turnover ratio = Net Annual Sales/Average fixed asset

The Fixed asset turnover ratio calculates net annual sales divided by average fixed assets and shows that how many sales are generated from each dollar of company’s fixed assets.

Total asset of the company = Fixed assets + current assets

The current assets of the company generally changed with the level of sales while fixed asset generally change with slower pace as investment in fixed assets are generally long-term decision of the company.

Therefore using total asset turnover would be more important than fixed asset turnover when the revenue of the company is growing consistently. If the revenue or sales of the company will change frequently and the fixed assets are not changing then the ratio will keep changing significantly. Average total asset includes both fixed assets as well as current assets and current asset generally changed with the growing revenues and keeps this ratio more consistent.