![]() So if you see a net loss, that's generally not a good thing, right? We want to be making money, not losing money. Right? We're always gonna have some positive assets only Net income can be a negative number. We can't have negative average total assets. Right? Because we can't have negative sales sales is always a positive number. ![]() So when can we get a negative are away? Well that's the same thing when we have a negative a net loss. That's why we talk profitability and um and efficiency above. First increase our profit margin, our profitability or we can increase our total asset turnover. So our multiplication will be a bigger number. Is going to go up because this first multiplication is going to be a bigger number or we can increase our total asset turnover, right? Because the second number is going to be a bigger number. First we can increase our profit margin right? By increasing our profit margin. Now we have two ways to increase our our away. It tells us how we can increase our our away. So why don't we just calculate our return on assets straight up? Why do we need to go through these extra steps? We'll notice what it does tell us. So that's why this equals our return on assets. So what's left net income in the numerator, average total assets in the denominator. Well look, when we do this multiplication, we've got net income divided by net sales and the net sales is in the numerator, net sales in the denominator? We'll remember from algebra when something is in the numerator and the denominator, they cancel out. Okay, So what does this tell us? Right, well, before we get into the last thing here, notice why this equals each other, right? Net income over average total assets. So the total asset turnover turnover tells us how many dollars of sales we earn per dollar of total assets owned. And how do we turn those assets into sales? Right. So we gotta we gotta maintain a level of assets for business to function properly. Well that tells us for each dollar of assets, right? For each dollar of the denominator, how much of the numerator we get. Right? So the profit margin tells us how much at the end of the day we keep for each dollar we sell and then the second one total asset turnover. So we when we sell something to a customer we'll we gotta pay for it cost a good sold operating expenses, interest, all the things we pay for. That's our top of the income statement and net income, that's the bottom of the income statement. It tells us how much net income we get for each dollar of sales, right? How much of the numerator per one of the denominator? So how much net income per dollar of sales. So our profit margin is this first ratio net income divided by net sales? That's tells us so look below the profit margin. And when we multiply them together, it gives us a return on assets. So those are two other ratios that we learn about. Is going to be equal to the profit margin, times the total asset turnover. Well we're gonna break it up into two ratios. ![]() Net income divided by average total assets. So when we first discussed our way, that's how we learned it. Remember that are away? We learned it as net income over average total assets. So this gives us a little more information of how we derive our our away and how we decompose it. ![]() If not you're gonna learn about them here. You might have learned about these already. We learned about profitability and we learn about efficiency with this ratio and we'll see why once we decompose it a little better so we can break up the R. Well we learned about two things with it. Remember our away it measures the income a company gets company earns based on the amount of assets it maintains. So we've learned about the return on assets before now, we're gonna decompose that ratio a little bit and get better information. ![]()
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