Net Fixed Asset turnover indicates how much sales the company makes for every Rs 1 of Net fixed assets.
Net Fixed Asset Turnover = Net Sales / Average Net Fixed Asset
Company ABC makes sales of Rs 100 Cr and Net fixed asset is Rs 10 Cr. Then the NFAT ratio is 10 (100/10).
For every R 1 of net fixed asset, the company generates Rs 10 of sales.
How to use practically
Net Fixed Asset Turnover (NFAT) is an efficiency ratio that indicates how well or efficiently a business uses fixed assets to generate sales.
Generally, a higher fixed asset ratio implies more effective utilization of investments in fixed assets to generate revenue.
This ratio is often analyzed alongside debt to equity ratio and Operating profit Margin to get a better picture of the strength of the business.
If the NFAT is declining over the years, it means that the company is not able to convert the fixed assets into sales. This is a weak signal about the company.
If the ratio is high and increasing means, the management is acting prudently and able to convert the fixed assets into sales.
The market normally loves companies that have a high NFAT ratio because these companies can invest a small amount of capital and increase the sales multi-fold.
Fixed assets vary significantly from one company to another and from one industry to another, so it is relevant to compare ratios of similar types of businesses in the same industry.