Business success for many firms is influenced by the utilization of fixed assets. Fixed
assets that sit idle do not generate revenue and, hence, do not provide a return on
investment. Thus, analysts examine the utilization of the fixed assets. The two
Operational Utilization Analysis
The operating statistics of fixed assets for some fixed asset-intensive industries are provided
by the reports filed with the SEC (Securities and Exchange Commission) and,
hence, are publicly available for analysis.
The closer the operational utilization approaches 100%, the more efficient the fixed assets.
Naturally, a 100% utilization would be rare; however, much smaller percentages
could indicate a problem. Exhibit 11 provides the ratio name and calculation for several
operational utilization ratios for a number of industries.
Financial Utilization Analysis
Fixed assets can also be evaluated by their ability to generate revenue. One measure
of the revenue-generating efficiency of fixed assets is the fixed asset turnover ratio. The
fixed asset turnover ratio measures the number of dollars of revenue earned per dollar
of fixed assets and is calculated
For every dollar of fixed assets, Marriott earns $4.12 of revenue. The larger this ratio,
the more efficiently a business is using its fixed assets. This ratio can be compared
across time within a single firm or to other companies in the industry to evaluate overall
fixed asset turnover performance. For example, the fixed asset turnover ratios for
Starwood Hotels & Resorts and Choice Hotels are 0.76 and 8.4, respectively. Marriott
is operating its hotel assets at an efficiency level between that of Starwood and Choice.
Choice’s high fixed asset turnover ratio can be explained by its aggressive franchising
strategy, which allows it to earn revenues in the form of franchising fees without owning
hotel fixed assets.
Exhibit 12 shows the fixed asset turnover ratio for a number of different businesses.
The smaller ratios are associated with companies that require large fixed asset
investments. The larger fixed asset turnover ratios are associated with firms that are
more labor-intensive and require smaller fixed asset investments.