Understanding the Relationship of Profit
Margin and Asset Turnover on the Earning Power of a Company.
In order for a company to have earning
power, the company needs to maintain and maximize its income by distinguishing
whether the company has a high or low inventory turnover. This means that
if the company has a low inventory turnover, it needs to maximize its profit
by having a higher markup on the good. If the company has a high inventory
turnover rate, the company can sell the goods at low profits and still
maximize their revenue.
Earning Power: determining
how to efficiently produce and generate Net Profit Margin
and maximize sales from proper total Asset Turnover.
Profitability ratio indicating the percentage of income that is a
The ability to maximize sales revenue from proper asset employment.
Earning Power is exemplified by my*
own experiences in working in a high inventory turnover company, Insight,
and a low inventory turnover company, Helzberg Diamonds.
Insight is a computer company that sells millions of computers
a day. In todayís society, computers are used daily and therefore are needed
daily. Since computers are needed daily, there isnít a need to have a high
profit markup. Therefore Insight is a high inventory turnover company because
it doesnít have to have a high markup on its merchandise but still be able
to make profit.
On the other hand, Helzberg Diamonds is a company where high
markup on the merchandise is needed because jewelry is not a good that
is bought daily. In order for the company to compensate for the low asset
turnover, the selling price of jewelry exceeds its cost.