04 January 2011
The fixed asset coverage ratio is a measure of how effectively a company is using its facilities and real property to produce financial results. Also known as the fixed asset turnover ratio, this measure of financial liquidity is derived by dividing the net sales of a company by the average net value of its fixed assets. The fixed asset coverage ratio formula can be shown as follows:
• (Net sales) / (Current average value of fixed assets)
Higher ratios are preferable. While fixed asset coverage ratio figures are not usually made publicly available, many investment analysts incorporate them into their assessments of a company’s overall health and real value; thus, the fixed asset coverage ratio can have a significant effect on the valuation of corporate stocks and future earnings.
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