Return on Assets/Asset Turnover question

[cibicl]

Hi, I was just wondering if anyone could me with this question - I'm struggling with the connection between different ratios.
For example,
1) Explain what a favorable change in asset turnover is indicating about the profitability of the business?
2) Explain how the return on assets can decrease one year despite the significant increase in asset turnover.

Any help would be greatly appreciated! Thanks

[ben4386]

1) Asset turnover measures the number of times sales exceeds average total assets, which gives an idea of how effectively the business has used its assets to earn revenue. A favourable change in Asset turnover means that per $1 of assets employed, the business will be generating more sales revenue. In other words a favourable change in asset turnover is one where it increases.

2) ROA = asset turnover x Net Profit Margin, where net profit margin is the amount of sales retained as net profit and gives an idea of the firms ability to control expenses. If the improvement in the profit margin is sufficiently large to overcome any fall in asset turnover, i.e. if the percentage increase in net profit margin is higher than the percentage decrease in asset turnover, ROA will increase. The logic is that despite your worsening ability to use assets to earn revenue, you are still receiving a higher return on assets as your expense control is much better.