What is the turnover rate of the fixed assets

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The purpose of any business is of course to generate profit, so there are a variety of metrics that entrepreneurs and investors use to gauge the efficiency of a company's business model. While many popular metrics, such as net profit margin, measure the degree to which a company is profitable, efficiency metrics measure how well a company is using what it already owns to generate profit. The turnover rate of property, plant and equipment is one such indicator.

The formula for the turnover rate of property, plant and equipment is as follows:

Property, plant and equipment sales = net sales / net receivables

To better understand how this calculation works, it is important to understand each component. Net revenue, simply enough, is the total operating revenue generated from the sale of goods or services, minus any deductions for returns or discounted prices.

Fixed assets are generally understood to be those assets that cannot easily be converted into cash. Current assets, such as securities and trade receivables, are not included in the fixed assets. Common tangible assets are real estate, equipment and vehicles. However, since fixed assets include all illiquid assets that benefit the company's operational efficiency over a longer period of time, a company's total fixed assets shown on its balance sheet may also include intangible assets such as goodwill. These intangible assets are deducted from the total for the purposes of calculating the turnover rate of property, plant and equipment, which results in the net fixed assets. This is often referred to as property, plant and equipment or PP&E as this type of large-scale investment typically makes up the bulk of net fixed assets.

The PP&D totals of some companies can fluctuate year round due to the sale or purchase of real estate or equipment. In these cases, the average net assets are used for the turnover rate of the fixed assets. This average is calculated by adding the net assets from the beginning and the end of the calculation period and then dividing by two.

Assume that ABC company had total sales of $ 150,000 for the year but lost $ 5,000 in returned product. Total fixed assets are $ 84,000. However, that includes $ 14,000 in intangible assets. Since these intangible assets are not included in the PP&E definition, they are deducted from total fixed assets. The fixed asset turnover for the given period is ($ 150,000 - $ 5,000) / ($ 84,000 - $ 14,000) or 07/02. This means that for every dollar invested in PP&E, the company generates $ 2. .. 07 in net sales.

There is no hard and fast rule for what constitutes good or bad inventory turnover, so this metric should always be compared to industry standards and the rates of other companies that are similar. A very equipment-intensive company like an automaker always has a larger overall system. If your tangible asset turnover rate is compared out of context to a company that uses fewer assets, such as an online software retailer, the results can be misleading.

In general, a high rate indicates that the company is making good use of its existing assets. A low rate is an indicator of low sales or that the company has invested too much in land or equipment that is not contributing to profit.