Question

5 Explain the trade-off between net operating profit margin and net operating asset turnover.

Answer 1

5. Net operating profit margin is the profit margin after deducting operating expenses from the gross profits of the firm. Net operating asset turnover is the turnover of operating assets based on sales. Net operating assets refer to the assets invested in business for generating turnover. Theses include Current assets and Current liabilities which are generated out of operations of the business.

A company with a higher Net Operating profit margin will have a lower Net operating asset turnover. It depends of the type of firm and the industry it is operating on how to balance Net operating profit margin and Return on operating assets. For example: Service companies can have a lower net operating margin but their net operating asset turnover can be higher. In case of manufacturing however high profit margin is required since the net operating asset turnover will be lower