From a working capital ratio to accounts receivable turnover ratio, there are plenty of figures in business that can help you assess your company performance, benchmark you against others, and highlight areas for improvement.
If your business is asset-heavy, there’s none better than a fixed asset turnover (FAT) ratio.
A ‘fixed asset’ is a tangible asset used within a business to generate revenue. These are usually items that you have for a long time – at least a year - and will depreciate until they’re no longer useful, break, or are replaced.
Examples of fixed assets include:
A fixed asset turnover ratio, or ‘FAT’ ratio, is a financial efficiency metric which measures how well a company uses its fixed assets to generate profit. It will consider net sales and the value of fixed assets over a set period (usually a year).
It’s important to pay attention to the word ‘fixed’ here as it’s possible to calculate an asset turnover ratio which measures sales revenue with total collected assets. This may include stock or other short-term assets within the business.
Because a FAT ratio looks at fixed assets only, it can be more suited to organisations and industries with large, high-value fixed assets, such as manufacturing, construction and real estate, agriculture, or transportation.
The formula to calculate your fixed asset turnover ratio is:
For example, if a company has annual turnover of £20m and net fixed assets that started at £500k and grew to £1m by the year end, the average fixed asset turnover ratio for the year would be 26.67.
(The average net fixed asset figure is calculated by adding the beginning and end balances, then dividing that number by two. In this case, this equals £750,000).
This means for every pound the business spent on fixed assets that year, they made almost £27 in return.
A ‘good’ ratio will differ depending on your industry and organisation size. There’s no one size fits all golden ratio to aim for, but you can compare to industry averages.
For example, retail businesses tend to have a higher fixed asset turnover ratio than manufacturing or construction as there is less machinery and upfront costs for materials required. Instead, the products are made by a supplier and shipped using a transportation partner.
If you calculate your fixed asset turnover ratio and it’s not where you’d like it to be compared to the industry average, there are a few steps you can take to improve this, including:
With Allianz Trade, trade credit insurance means you can make informed, data-led decisions to safely increase your exposure to new customers, increase credit limits, and boost profitability. This can help improve your fixed asset turnover ratio, as will our support with debt collection.
If you’d like to learn more about how we help with collections, please read: What happens when you place a debt for collection?
For more information about trade credit insurance and its benefits, explore our Insights or request an online quote.
Allianz Trade is the global leader in trade credit insurance and credit management, offering tailored solutions to mitigate the risks associated with bad debt, thereby ensuring the financial stability of businesses. Our products and services help companies with risk management, cash flow management, accounts receivables protection, Surety bonds, Business Fraud Insurance, debt collection processes and e-commerce credit insurance ensuring the financial resilience for our client’s businesses. Our expertise in risk mitigation and finance positions us as trusted advisors, enabling businesses aspiring for global success to expand into international markets with confidence.
Our business is built on supporting relationships between people and organisations, relationships that extend across frontiers of all kinds - geographical, financial, industrial, and more. We’re constantly aware that our work has an impact on the communities we serve and that we have a duty to help and support others. At Allianz Trade, we’re strongly committed to fairness for all without discrimination, among our own people and in our many relationships with those outside our business.
