MCSE,SCAA,CCNA Siddharth Birje (IT Professional (Systems)) (59 Points)
14 February 2015Hi,
I am currently studying FM (IPCC). Can anyone please explain me the following statement
"Asset Turnover ratio is inversely proportional to Net Profit Margin"
Higher the Net Profit Margin, Lower is the Asset Turnover Ratio.
Why is this so?
Regards,
Siddharth
Sanat Biswal
(Chartered Accountant)
(1139 Points)
Replied 14 February 2015
| Originally posted by : MCSE,SCAA,CCNA Siddharth Birje | ||
 |
Hi, I am currently studying FM (IPCC). Can anyone please explain me the following statement "Asset Turnover ratio is inversely proportional to Net Profit Margin" Higher the Net Profit Margin, Lower is the Asset Turnover Ratio. Why is this so? Regards, Siddharth |
 |
Hiiii....the above relationship is based on Du-Pont analysis,which states a formula for ROA(Return on assets) as follows:-
ROA(Return on assets)
=NET INCOME/AVERAGE TOTAL ASSETS....(Lets say "a")
=(NET PROFIT MARGIN)*(ASSET TURNOVER RATIO)
Now from the above formulaes,we can say that ATR=a/NPM
Thus it can be seen that an inverse relationship has been established between NPM AND ATR FROM ABOVE EQUATION
So,it can be said that whenever NPM increases,ATR decreases and vice-versa.
Hope I could clear your querry....CHEERS
Mukund
(Nil)
(36 Points)
Replied 25 September 2015
The above answer by Bansal gives you a thoratical framework.But if you want to know how this works practically,let's make a simple example
You sell for 100rs,you earn 20rs profit the cash in your bank is 20rs so you turn 5 times.
Your friend sell 100rs but earns 40rs profit cash in his bank is 40 his asset turn will be 2.5times
If your NPM increases your asset turn decreases or if NPM decreases your asset turn will increase.
CAclubindia
