Company Z has a Fixed Asset Turnover ratio of 5.0, while the industry average is 3.0. However, the average age of Company Z's assets is 10 years, compared to the industry average of 4 years. What is the most likely conclusion?

Answer options:

Company Z is significantly more efficient at using its assets to generate sales.

Company Z has invested heavily in new technology.

The high turnover ratio is likely distorted by the low book value of old, depreciated assets.

Company Z should write down its assets for impairment.

How to approach this question

Look at the denominator: Net Fixed Assets. If assets are old, Accumulated Depreciation is high, so Net Assets is low. Low denominator = High Ratio.

Full Answer

C.The high turnover ratio is likely distorted by the low book value of old, depreciated assets.✓ Correct

The high turnover is likely a mirage caused by the denominator (Net Fixed Assets) being very small due to accumulated depreciation. This indicates the company may have an aging fleet and looming capex needs, rather than superior efficiency.

Common mistakes

Taking the ratio at face value without considering asset age.

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