Definition, Explanation and Use:
Non-current asset turnover ratio determines the efficiency with which a business uses its non-current assets to generate revenue for the business. The ratio is usually calculated as follows:
Click on Analysis of Financial Statement of a Business to read the solved example of non-current assets turnover ratio.
Analysis and Interpretation:
Low non-current assets turnover rate may indicate the business is not using its assets effectively whereas a high turnover rate implies that business is more efficient in using its non-current assets.
The importance of this ratio also varies with the type of business; a manufacturing firm generally has a much a greater investment in plant and machinery than a retail business, so this ratio should be monitored carefully. A retailer is much more concerned with the rate of inventory turnover, as the variety and quality of inventory plays an important part in improving his sale figures.
Note: The differences in the age and condition of non-current assets between businesses may complicate interpretation of this ratio. The use of net book value in the calculation means that the ratio is strongly affected by the company’s depreciation policy.
Given the same level of sales, a business with old, highly depreciated non current assets will have a higher fixed asset turnover ratio than one with new, barely depreciated non-current assets.