Asset turnover ratio relationship with net profit margin

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

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.