![]() ![]() The fixed asset turnover ratio measures the number of dollars of sales earned per dollar of fixed assets. Debt management ratios attempt to appraise the impact of financial leverage on risk while profitability ratios indicate the impact of financial leverage on returns.A measure of a company’s efficiency in using its fixed assets to generate revenue is the fixed asset turnover ratio. Financial leverage therefore implies a change in financial risk and also has implications on shareholder returns. additional risk, however, can yield additional return and if the firm earns more on the borrowed funds than it pays, the return on equity increases. claims must be satisfied before earnings can be distributed to shareholders. The more debt a firm has, the greater its risk of being unable to meet its contractual debt payments and thus becoming insolvent. In addition, the more financial leverage a firm has, the higher will be its financial risk. Raising funds through debt enables shareholders to maintain control of a firm while limiting their investment. The debt position of a firm gives a measure of the amount of other money being used to generate profits. The extent to which a firm uses debt financing is known as financial leverage. Debt management ratios Debt management plays a critical role in financial management. It is of particular interest to management in indicating whether the operations have been financially efficient. Generally, the higher a total asset turnover, the more efficiently its assets have been used. ![]() 473 million ratio is below the industry average that is not generating enough sales given its total assets. the industry average of the total assets turnover is 2 times. Example ABC limited has total assets of sh million. the most valid comparison of asset turnover may therefore be at one date to that of the same firm at another recent date. Likewise some organizations participates in many industries and the exact meaning of the turnover ratio may be obscured. ![]() Since different industries require very different asset structures, comparing asset turnover ratios from one industry to another is potentially meaningless an must be done with caution. it is calculated as follows: Total assets turnover ratio sales total assets This ratio measures the effectiveness in utilizing all its assets. Total asset turnover The total assets turnover ratio measures the turn over utilization of all the operating assets in relation to turnover. thus if we compare an old firm whose fixed assets have been depreciated with a new company with similar operations that acquired fixed assets only recently, the old firm would probably have a higher fixed assets turnover ratio although this would be more reflective of the age of the asses rather than inefficiency on the part of the new firm. Inflation causes many of the assets that were purchased in the past to be significantly understated. ![]() Fixed assets are shown on the balance sheet at their historical costs less depreciation. Potential problems may arise when interpreting this ratio. fixed asset turnover is slightly below the industry average of 14 indicating that it is using its fixed assets slightly less intensively than other firms in the industry. 74 million The industry average of the fixed asset turnover is 14 times. 900 million and its fixed assets are worth sh 74. Fixed assets sales Fixed assets Example sales are sh. it is arrived at dividing sales net fixed assets. it indicates the utilization of plant and equipment relative to operating levels indicated the turnover. Preview text Fixed asset turnover This ratio measures how effectively the firm uses its plant and equipment.
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