It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets IF AND ONLY IF all the firms being compared have the same proportion of fixed assets to total assets.

Question

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The fixed assets turnover ratio is calculated by dividing a company's sales by its fixed assets. It is used to determine how effectively a company is using its fixed assets to generate revenue. However, this ratio should not be used to compare companies with different proportions of fixed assets to total assets as it may be skewed. For example, a company with a higher proportion of fixed assets may have a lower fixed assets turnover ratio but can still be generating more revenue from its fixed assets. Therefore, it is not appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if they have different proportions of fixed assets to total assets.

It Is Appropriate to Use the Fixed Assets Turnover Ratio