Question

Give an example of an industry that would be characterized by. A high asset turnover and a low profit margin. and A low asset turnover and a high profit margin.

Answer 1

Asset turnover and profit margin measure efficiency and profitability.

Asset turnover is the ratio of sales revenues to average total assets. If your company has high asset turnover, it extracts good sales volume from its assets -- in other words, it is efficient.

Profit margin percentage is net income divided by sales revenues. It measures how much profit youra company can earn from its sales. A low profit margin is a way to attract cost-conscious consumers with low prices.

Industry having high asset turnover and a low profit margin -- WAL-MART

Wal-Mart depends on huge-scale operations to keep profit margins low. Its ROA of 8.39 percent results from an asset turnover of 2.39 percent and a net profit margin of 3.51 percent. Wal-Mart epitomizes the high-asset-turnover, low-profit-margin strategy by leveraging its superior size to achieve economies of scale that allows it to maintain lower prices. One risk of a low-profit margin strategy is that a company might start to cut corners to maintain its low prices. For example, according to a March 2013 Bloomberg story, Wal-Mart was showing symptoms of understaffing. Many other factors affect a company’s success, such as the cost of capital, marketing strategy and personnel policies, but ROA and its components offer powerful insights into the way a company operates.

Industry having low asset turnover and a high profit margin -- Craigslist

Craigslist is the leading classifieds service in almost every category - real estate, cars, jobs, even dates. Craigslist purportedly operates with about 50 employees . It is conservatively e stimated that in 2016, Craigslist realized ~$700mm of revenue, with net margins of around 80%.