A recent article over on CPO Agenda on Skills for the Future that summarized the findings from a recent workshop that debated the skills the future would require identified better finance skills as keys to future purchasing success. Since the article simply rambled off a list of terms with no definition, I decided I’d define the basics for you.
Asset Turnover: is the amount of sales generated for every dollar worth of assets. Simply put, it is
revenue divided by assets. It measures an organizations efficiency at using assets to generate revenue. The higher, the better. It can also indicate pricing strategy. A company with a low profit margin tends to have high asset turnover, while those with high profit margins tend to have low asset turnover.
Return On Investment: (ROI) is a performance measure used to evaluate the efficiency of an investment. It is calculated as
the return on investment divided by the cost of the investment. The higher the ROI, the better the investment.
Return on Invested Capital: (ROIC) is a performance measure used to assess the company’s efficiency at allocating the capital under its control to profitable investments. It is calculated as
the Net Return for all Investments divided by the Total Capital available. (Where Net Return is Net Income minus Dividends).
Profit Margin: net margin, net profit margin, or net profit ratio is a measure of profitability that is equal to the
net profit (after taxes) divided by revenue. Like Asset Turnover, ROI, and ROIC, bigger is better.