This ratio tells you how many dollars of sales your company gets for each dollar invested in property, plant, and equipment (PPE). It’s a measure of how efficient you are at generating revenue from fixed assets such as buildings, vehicles, and machinery. The higher our PPE Turnover, the more efficient we are with our capital investments.
The formula for PPE Turnover is simply total revenue (from the income statement) divided by ending PPE (from the balance sheet):
If we have $8,000 in revenue this year and divide that by property plant and equipment investments worth $2,000, our PPE Turnover is:
$8,000 / $2,000 = $4
This means we generated $4 in sales revenue for every $1 of PPE.
(Excerpts from Financial Intelligence, Chapter 24 – Efficiency Ratios)
A company that generates a lower PPE turnover, other things being equal, isn’t using its assets as efficiently as a company with a higher one. So check the trend lines and the industry averages to see how your company stacks up.
But please note that sneaky little qualifier, “other things being equal.” The fact is, this is one ratio where the art of finance can affect the numbers dramatically. If a company leases much of its equipment rather than owning it, for instance, the leased assets may not show up on its balance sheet. Its apparent asset base will be that much lower and PPE turnover that much higher. Some companies pay bonuses pegged to this ratio, which gives managers an incentive to lease equipment rather than buy it. Leasing may or may not make strategic sense for any individual enterprise. What doesn’t make sense is to have the decision made on the basis of a bonus payment.