Decompose Return Into Margin and Turns
Calculate an operating return using margin and asset turnover to explain a change in performance.
A business reports operating margin of 10.0% and asset turnover of 0.75x last year. This year, operating margin is 10.3% and asset turnover is 0.93x. Operating return = operating margin x asset turnover Attributing a return improvement to pricing without decomposing margin and turns can misidentify the operating driver. Calculate prior return 10.0% margin x 0.75x asset turnover = 7.5% operating return. The prior return combines profit per sales dollar with sales per asset dollar. Calculate current return 10.3% margin x 0.93x asset turnover = 9.6% operating return. The current return improved by 2.1 percentage points. Attribute the driver Margin…
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