Asset Turn over and Profit margin

CFA Level I
#1

Hello all, Can anyone explain why the following is true: The higher a companys Asset turnover, the lower its profit margin tends to be and vice versa. Thanks

#2

Write the formulas: Asset turnover: Sales (revenue)/total assets Profit margin: Net Income / Sales (revenue) Sales is once at numerator, once at the denominator. Should be pretty clear why the higher the asset turnover, the higher the sales, the lower the 1/sales, therefore the lower the NI/Sales.

#3

This is not necessarily true in general. However, if we hold net income and total assets constant, then a higher asset turnover comes from higher sales, and higher sales combined with constant NI results in lower profit margin.

#4

Ofcourse, silly me. Thanks Map

#5

compare tifanys to kroger. boom

#6

Reineir Wrote: ------------------------------------------------------- > Hello all, > > Can anyone explain why the following is true: The > higher a companys Asset turnover, the lower its > profit margin tends to be and vice versa. > > Thanks For a given ROA. ROA = NetIncome/Assets = (NetIncome/Sales)*(Sales/Assets) = PM*AT

#7

You can also have a higher asset turn over if your assets are low. In that case it isnt necessary if your profit margin is low then.

#8

That’s why a high asset turnover and and a high profit margin usually means the company is doing well and heading in the right direction.