Fixed Asset Turnover

CFA Level I FRA
#1

Fixed Asset Turnover = Revenue/Avg. NET Fixed Assets

Statement from Schweser Notes:

“Since ‘net’ here refers to net of accumulated depreciation, firms with more recently acquired assets will typically have lower fixed asset turnover ratios.”

Hmm?

If you’re reducing Fixed Assets by d

And the light bulb just went off…figured I’d post it anyway incase someone else trips up on it…as I was about to type depreciation, I realize its ACCUMULATED depreciation. I figured depreciation would be higher in the instance of new purchase, which would reduce net fixed assets MORE than older fixed assets, thus reducing the denominator creating a larger ratio, because older fixed asset depreciation may be less or non-existant depending on method used. Accumulated will be higher as time goes on, causing newer purchases to have a higher “net fixed asset” number and older purchases to have a lower. Since it’s in the denominator, higher fixed assets = lower ratio and lower fixed assets = higher ratio.

I need more coffee.

#2

Fixed Asset Turnover ratio is not only dependent upon fixed assets, but also upon revenue.

higher fixed assets = lower ratio and lower fixed assets = higher ratio will hold good if you keep revenue constant.

Speaking generally, capex increases the depreciation. But on the plus side, it also adds to the revenue generation capacity of a firm.

So, it is not that incurring capital exp. will only deteriorate the ratio, until you keep a constrant on sales.

Fix. Asset T/O ratio will deteriorate only when the proportion of capex adds more on the depreciation side and less on the revenue side.

RATIO = NUMERATOR / DENOMINATOR

here, we should not assume that denominator would only increase/decrease. Incurring capex has not always a long gestation period.