Difference between Asset Turnover and Fixed Asset Turnover

BusinessDifferencesManagement

The investment of a business in its assets is vital not only for the generating of profits but also for the ease with which the firm may be operated. Even though there are many different kinds of assets that differ in their ability to be converted into cash, how they are used, and their physical presence, all of these factors have an impact on how well a corporation does. Utilizing metrics such as asset turnover, fixed asset turnover, inventory turnover, and receivables turnover may provide valuable insight into an organization's overall profitability.

What is Asset Turnover?

This is a ratio that measures the amount of revenue produced by an organization relative to the amount of each asset that is put to use. It is helpful in analyzing the efficiency of a company as well as discovering better ways of generating money via the usage of the assets that are currently at one's disposal.

In contrast, a low asset turnover ratio suggests that the company's assets are not being exploited to their full potential, whereas a high asset turnover suggests that the company's assets are being put to good use. This metric is used to assess not just the effectiveness of assets held for the short term but also those held for the long term. The concept of asset turnover presupposes that every asset is utilized in the production of income.

The asset turnover rate may be calculated by dividing the total net sales revenue by the average amount of all assets.

The significance of the rotation of assets −

  • It aids businesses in gaining an understanding of how effectively they can make money by utilizing the assets at their disposal.
  • It is useful for making comparisons between businesses operating in the same industry.
  • It helps bring an organization's inherent flaws into the light.
  • However, there are some restrictions to the asset turnover ratio. For instance, it might not provide an accurate picture in situations in which a significant new asset is acquired or disposed of.

What is Fixed Asset Turnover?

The ratio of a company's sales revenue to the value of its fixed assets, which include its land, building, and machinery, is known as the sales-to-fixed-assets ratio. In addition to analyzing a company's operating performance, it determines how well a company can use its fixed assets to generate revenue. A lower fixed asset turnover is a sign of the inefficient use of fixed assets in the development of revenue, whereas a greater fixed asset turnover is an indicator of the utilization of fixed assets in the generation of assets for the organization.

The ratio of annualized net sales revenue to annualized average net fixed assets is used to calculate the turnover of fixed assets.

The significance of the rotation of fixed assets −

  • Determines whether or not additional fixed assets result in increased revenues.
  • Identifies how well older fixed assets are being utilized.

However, the turnover of fixed assets is subject to certain restrictions. For instance, it may provide the wrong impression in businesses that have cyclical revenues. Additionally, businesses that have a high turnover rate of their fixed assets might nevertheless end up losing money because this does not indicate a strong cash flow.

Differences: Asset Turnover and Fixed Asset Turnover

Both of these measurements determine the value of sales with respect to assets. The following table highlights the major differences between Asset Turnover and Fixed Asset Turnover −

Characteristics Asset Turnover Fixed Asset Turnover
Definition The term "asset turnover" refers to a ratio that is used in connection to the number of sales generated in an organization for each unit of asset that is put into use. The ratio of the value of a company's sales to the value of its fixed assets, which include its property, plant, and equipment, is referred to as the company's fixed asset turnover.
Assets The turnover of assets consumes up all of the assets. Turnover of fixed assets makes use of fixed assets.
Computation The asset turnover rate may be calculated by dividing the total net sales revenue by the average amount of all assets. The ratio of annualized net sales revenue to annualized average net fixed assets is used to calculate the turnover of fixed assets.
Importance The measure of a company's ability to create money from its available assets, as well as its ability to compare itself to other businesses operating in the same industry and to identify areas of its own operations in which it may be lacking, may be determined by calculating its asset turnover. The turnover of fixed assets may be used to identify not just whether new fixed assets boost sales but also whether older fixed assets are still effective in their roles.
Limitations The turnover of assets could not paint an accurate picture in situations in which a significant new asset is acquired or disposed of. In businesses that experience cyclical revenues, the turnover rate of their fixed assets might provide the wrong impression. Additionally, businesses that have a high turnover rate of their fixed assets might nevertheless end up losing money because this does not indicate a strong cash flow.

Conclusion

The term "asset turnover" refers to a ratio that is utilized in connection to the overall income earned in an organization for each unit of asset that is put into use. The formula for calculating it is to divide the whole organization's net sales income by the organization's average amount of assets.

On the other hand, the term "fixed asset turnover" is used to describe the ratio of the value of a company's annual sales to the value of its fixed assets, which include its land, buildings, and machinery. To calculate it, divide the total amount of net sales revenue by the average amount of net fixed assets.

raja
Updated on 18-Aug-2022 14:12:00

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