The Total Asset Turnover Ratio (TATR) measures a company’s efficiency in utilizing its assets to generate sales revenue, indicating its overall management effectiveness and capacity to produce profits.
Primary Implication
The assets in your business either contribute to sales or don’t.
The Total Asset Turnover Ratio confirms how efficiently your business uses its assets to generate sales from each dollar of company assets. A ratio greater than one means that every dollar of assets generates more than a dollar of sales.
One of the primary reasons small businesses over-extend themselves is not because they sell more than they can support. It’s because they have too much capital and debt tied up in assets, not producing their value in sales.
Overview
The real value of any business is not in the assets it owns, but in the profits and cash flows generated by those assets. Value is a function of the returns to the owners, after accounting for the costs of acquiring and maintaining the business’s assets.
The Total Asset Turnover Ratio (TATR) is an Efficiency Ratio that measures the value of the investment or money tied up in a business waiting to become throughput. This ratio measures how efficiently a company uses its assets to generate sales from each dollar of company assets.
Since the assets of a business equate to a business’s capacity to earn money from its resources, TATR also measures how well a company is managed and how it uses its assets to produce products and sales. Adding assets requires capital, which means those new assets need to earn a return to cover the cost of this additional capital.
The formula for the Total Asset Turnover Ratio is as follows:
Net Sales / Total Assets
A ratio of 0.5 means that each dollar of assets generates 50 cents of sales.
Higher is Better: this means that the company is better at using its assets to generate sales
Lower is Worse: the company isn’t using its assets efficiently, reflecting either sales, operations, or financial management problems.
