Chartered Financial Analyst (CFA) Level 1 Practice Exam

What is the formula for Fixed Assets Turnover?

1. Revenue / average fixed assets

2. Average fixed assets / cost of goods sold

3. Total sales / average fixed assets

4. Cost of goods sold / average fixed assets

The correct answer is: Revenue / average fixed assets

The Fixed Assets Turnover ratio is a key financial metric used to assess how efficiently a company utilizes its fixed assets to generate sales revenue. The formula for this ratio is based on dividing the total revenue by the average fixed assets. Using this formula, we can see how effectively a company is using its property, plant, equipment, and other fixed assets to produce revenue. A higher ratio indicates that the company is generating more revenue per dollar of fixed assets, which is generally a positive sign of operational efficiency. This metric is particularly important for capital-intensive businesses that invest heavily in fixed assets to drive their operations. By analyzing the Fixed Assets Turnover, investors and analysts can gauge the effectiveness of management in deploying the company's fixed assets. In contrast, the other options do not accurately reflect what Fixed Assets Turnover measures. For example, cost of goods sold is not the focus of this ratio, nor does it incorporate the calculation of revenue in a manner that aligns with industry standards for measuring asset utilization. Therefore, the correct approach to determining the Fixed Assets Turnover is indeed through the revenue to average fixed assets formula.