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

Quizplus · Accepted Answer

The fixed assets turnover ratio measures a firm's ability to generate sales from its fixed assets. However, it can be misleading to compare this ratio across firms if they have different proportions of fixed assets to total assets. For example, a construction company may have a much higher fixed asset turnover ratio than a software company, simply because construction companies require more fixed assets such as equipment and buildings. Therefore, it is not appropriate to use this 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