Are You Using Your Kit Efficiently?

Most businesses have to invest in fixed assets in order to produce goods/services, to determine how efficient the business is in using those fixed assets you can use the following calculation.

sales revenue / nbv of fixed assets = fixed asset turnover ratio

sales revenue (turnover)
nbv fixed assets net book value is cost of fixed assets less accumulated depreciation
the nbv value used is the average of the value at the start and end of the year

Example

Year 1
sales revenue £100,000
nbv fixed assets £12,000
fixed asset turnover ratio 8.33

Year 2
sales revenue £120,000
nbv fixed assets £16,000
fixed assets turnover ratio 7.50

In the example turnover has increased by £20,000 but an extra £4,000 of fixed assets has been required to produce it (fixed asset turnover ratio of 5.00), further investigation would be required to understand why the ratio has fallen from 8.33 to 7.50.
As well as comparing results year on year it would also be useful to benchmark against other comparable businesses to see how the ratio compares.