Question

Reducing WC, Intangibles, or PPE would seem to increase the TAT. What is the trade-off that must be analyzed for one of these strategies to accomplish the goal of increasing the TAT?

Answer 1

Total asset turnover ratio is a measure of how well the company is using its revenue to generate the revenue for its company. Now to increase the ratio either the revenue must be increased or assets must be decreased. Increasing revenue is not always easy for the company to do so it might consider reducing the asset level but the must consider the long-term impact of that decision. In the short term by reducing assets base the company might be able to increase its assets turnover ratio to justify to the outside investor but in the long term this can backfire. The overall revenue might fall because of less working capital investment or PPE and at that it would be very costly for the company to set up again the entire assets to increase the revenue base. The company also need to take into account the absolute amount of revenue rather than just the ratio because if the asset base is small then firm can easily achieve the high asset turnover rate but with high it becomes slightly difficult to maintain that ratio.