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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.


 
 

Profit Margin: Profitability ratio indicating the percentage of  income that is a firmís profit.





Asset Turnover: The ability to maximize sales revenue from proper asset employment.
 

Example:
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.
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*(Dan Jasinski)