Sales to Fixed Assets Ratio in Excel Formula

What is Sales to Fixed Assets Ratio?

The sales to fixed assets ratio, also known as the fixed assets turnover ratio, is a performance measurement tool that measures the efficiency with which a company uses its fixed assets to generate sales. Fixed assets are long-term assets that are not easily converted into cash, such as property, plant, and equipment (PP&E).

The ratio compares the net sales of a company to its average fixed assets over a period of time, usually a year. The net sales are the amount of sales revenue after deducting sales returns, discounts, and allowances. The average fixed assets are the average of the fixed assets at the beginning and the end of the period, net of accumulated depreciation.

A higher ratio indicates that a company is more efficient in using its fixed assets to generate sales, meaning that it can produce more sales with less investment in fixed assets. A lower ratio suggests that a company is less efficient, meaning that it has invested too much in fixed assets that are not generating enough sales.

The formula for the Sales to Fixed Assets Ratio is:

Here,

• Net Sales: Total revenue generated by the company after deducting sales returns, discounts, and allowances.
• Average Fixed Assets: Calculated by taking the average of the fixed assets at the beginning and end of the period.

The higher the Sales to Fixed Assets Ratio, the better a company is utilizing its fixed assets to generate sales, indicating efficiency. However, it’s important to compare this ratio with industry benchmarks and consider other factors to get a comprehensive understanding of a company’s performance.

How to Calculate Sales to Fixed Assets Ratio in Excel?

To calculate the sales to fixed assets ratio in Excel, you need to have the following data:

• Net sales for the period
• Fixed assets at the beginning of the period
• Fixed assets at the end of the period
• Accumulated depreciation at the beginning of the period
• Accumulated depreciation at the end of the period

You can enter these data in separate cells in Excel, for example:

Then, you can use the following formula in another cell to calculate the sales to fixed assets ratio:

=B1/(AVERAGE(B2-B4,B3-B5))

The formula works as follows:

• B1 is the net sales for the period
• AVERAGE(B2-B4,B3-B5) is the average fixed assets for the period, calculated by subtracting the accumulated depreciation from the fixed assets at the beginning and the end of the period, and then taking the average of the two values
• The formula divides the net sales by the average fixed assets to get the ratio

The result of the formula is 2.5, which means that the company generated $2.5 of sales for every dollar of fixed assets.

Example of Sales to Fixed Assets Ratio in Excel

To illustrate the sales to fixed assets ratio in Excel, let’s use a hypothetical scenario. Suppose that a company sells furniture and has the following data for the year 2023:

Using the formula above, we can calculate the sales to fixed assets ratio in Excel as follows:

=B1/(AVERAGE(B2-B4,B3-B5))

The result of the formula is 2.86, which means that the company generated $2.86 of sales for every dollar of fixed assets.

Interpretation and Analysis of Sales to Fixed Assets Ratio

The sales to fixed assets ratio can be used to evaluate the operating performance and efficiency of a company. A higher ratio indicates that a company is more productive and profitable in using its fixed assets to generate sales. A lower ratio suggests that a company is less productive and profitable, and may have overinvested or underutilized its fixed assets.

However, the ratio should be used with caution and in comparison with other ratios and factors. Some of the limitations and considerations of the ratio are:

• The ratio may vary depending on the industry and the nature of the business. Some industries are more capital-intensive than others, requiring more fixed assets to operate. Therefore, a lower ratio may not necessarily mean inefficiency, but rather a reflection of the industry norm.
• The ratio may not reflect the quality or condition of the fixed assets. A company may have old or obsolete fixed assets that are fully depreciated, but still generate sales. This would result in a high ratio, but not necessarily a good performance. Conversely, a company may have new or upgraded fixed assets that are not fully depreciated, but generate lower sales. This would result in a low ratio, but not necessarily a poor performance.
• The ratio may be affected by the accounting methods and policies of the company. Different methods of depreciation, valuation, and recognition of fixed assets may affect the ratio. For example, a company that uses the straight-line method of depreciation will have a lower ratio than a company that uses the double-declining balance method, all else being equal.
• The ratio may not capture the impact of other factors that affect sales, such as market demand, competition, pricing, marketing, customer service, etc. A company may have a high ratio, but still have low sales due to external or internal factors. Likewise, a company may have a low ratio, but still have high sales due to other factors.

Therefore, the sales to fixed assets ratio should be used as a general indicator of efficiency, rather than a definitive measure of performance. It should be compared with the historical trends of the company, the industry averages, and the ratios of the competitors. It should also be complemented with other ratios and analysis, such as the return on assets, the profit margin, the asset turnover, the current ratio, the debt-to-equity ratio, the SWOT analysis, etc.

Other Approaches to Calculate Sales to Fixed Assets Ratio

There are other approaches to calculate the sales to fixed assets ratio, depending on the data available and the preference of the analyst. Some of the alternative approaches are:

• Using total fixed assets instead of average fixed assets. This approach simplifies the calculation by using the fixed assets at the end of the period, instead of taking the average of the beginning and the end of the period. However, this approach may not reflect the changes in the fixed assets during the period, and may overstate or understate the ratio.
• Using gross fixed assets instead of net fixed assets. This approach uses the fixed assets before deducting the accumulated depreciation, instead of after deducting it. This approach may be useful for comparing companies that use different depreciation methods, or for analyzing the replacement value of the fixed assets. However, this approach may not reflect the true value of the fixed assets, and may overstate or understate the ratio.
• Using operating income instead of net sales. This approach uses the operating income, which is the income from the core operations of the business, instead of the net sales, which is the total revenue from all sources. This approach may be useful for comparing the profitability of the fixed assets, rather than the revenue. However, this approach may be affected by the operating expenses and the accounting policies of the company, and may not reflect the sales potential of the fixed assets.

The choice of the approach depends on the purpose and the context of the analysis, and the availability and reliability of the data. The analyst should be consistent and transparent in applying the approach, and explain the assumptions and limitations of the calculation. The analyst should also compare the results of different approaches, and explain the reasons for any significant differences or discrepancies.