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

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.

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.

Ofcourse, silly me. Thanks Map

compare tifanys to kroger. boom

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

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.

Thatâ€™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.