The majority of activity ratios measure the ability of the company to turn assets into earnings. All businesses utilize a simple principle, buy an asset at a low price and sell it at a higher price. Even service based businesses do this. Labor is purchased for a certain value and then sold for a much higher price. Retail businesses purchase inventory and then turn around, mark it up and then sell it to make a profit. There isn’t any business out there that doesn’t exercise this basic business principle.
Fixed Asset Turnover Ratio
A more refined ratio of the total assets turnover ratio is the fixed assets turnover ratio. This ratio is designed to measure the utility of fixed assets by dividing the entity’s profit by its fixed assets. This ratio is best used with fixed asset intensive sectors such as real estate, utilities, shipping and hospitality. As with all ratios, it should never be used as an isolated tool to determine value.
The fixed assets turnover rate is another activity ratio whereby an income statement financial characteristic is compared to a balance sheet asset section. In this case, comparing adjusted sales against historical cost of fixed assets. This financial business ratio is only effective for business operations that are fixed asset intensive. With service based industries like carpet cleaning, professional firms and medical practices this particular ratio is impractical.