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Total Asset Turnover Paper

888 Words4 Pages

B. Total Asset Turnover “The asset turnover ratio is an efficiency ratio that measures a company’s ability to generate sales from its assets by comparing net sales with average total assets” (Asset Turnover Ratio 2018). In other words, financial managers utilize the total asset turnover (TATO) to determine the company’s ability to efficiently utilze its assets to generate revenues. In addition, investors and creditors utilize TATO to better understand a company’s management style as well as to figure out how the company utilizes it current and long-term assets to generate its products and revenues. To calculate the TATO ratio, the financial manager utilizes the figures from the company’s consolidated income statement and consolidatd balance sheet, which include (1) nets sales (income statement) and (2) total assets (balance sheet). Financial managers need to utilize net sales opposed to gross sales …show more content…

Therefore, creditors and investors utilize the comparison between the interested company and its industry to determine if a company is efficiently utilzing its assets to generate revenues. In addition, TATO enables creditors and investors to obtain a glimpse of company management. The home improvement retail industry has a 1.80 TATO for 2014 and a 1.91 TATO for 2015. After comparing Home Depot’s TATO to the industry’s TATO for both 2014 and 2015, Home Depot’s TATO is 0.15 higher in 2014 and 0.18 higher in 2015. Therefore, Home Depot generates an additional $0.33 when the company invests assets totaling $0.33. Since both of Home Depot’s TATOs are above 1.00, the company is maximize its asset utilization to generate revenues, which is considered favorable to both investors and creditors (Home Improvement Industry 2014) (Home Improvement Industry 2015) (The Home Depot, Inc. Form 10-K 2015) (Asset Turnover Ratio

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