Another trip to New York this week. I’ll be back in the city again next week. This week was AdaCore a private software company, next week is NBCUniversal. Since it was spring break, I brought my wife and youngest son and made a mini vacation out of it. At least my wife and son did. The city was cold and rainy this trip but I did get one run around Central Park in this morning which was nice.
This was my second session with the AdaCore group and the training was great. Last year I did a training for them in Paris. They are a sharp group, a lot of good questions and discussion. The focus of this group in the business was sales and marketing. We adjusted the material to allow them to look specifically at the financials of some of their clients. We picked up some great insights along the way. In a sales environment, understanding your client financially can help with the sales process. If one sells to a public company, understanding how the business is doing financially helps a sales rep with the best approach with that client.
One of the attendees asked a very specific question about a ratio. He asked how the total asset turnover related to other ratios particularly the profit margins. I loved the question as any finance geek like me would. The asset turnover ratio is simply sales for a given period divided by average assets on the balance sheet during that period. It tells the analyst how much revenue the assets generate. Of course, you want to generate as much revenue as possible for every dollar of assets.
The question was great because according to the DuPont ratio relationship, asset turnover multiplied by the net profit margin percentage gives you another key ratio, the total return on assets, which is net income divided by total assets. Some call this ratio a business’ return on investment because the assets that a business uses represents the total investment in that business. This DuPont relationship was developed by an engineer at DuPont in the late 1930’s who worked in the marketing department. He wanted to develop and understand ratios and their relationships to be better as a marketing leader.
It turns out that this part of the DuPont ratio relationship was very useful to managers seeking to improve return on assets or ROI. Most business executives would focus on getting higher margins in their businesses to improve this metric. Business managers tend to focus on the income statement and how they can increase prices or cut costs to improve margins. What we learned from the DuPont formula is that there is another way to improve this ROI metric. It is to find a way to get more revenue out of company assets. There are many examples of successful businesses built around this asset efficiency philosophy. One notable example is Walmart and their drive the get higher inventory turnover. If inventory turns faster in your business, then you will have less of your money tied up in inventory and thus your total asset turnover will be higher. Walmart figured this out and was able compete at lower margins in their stores because of the higher asset turnover.
It was fun to revisit some of my corporate finance training with this group. I haven’t talked about the DuPont stuff in a while, when I do more in depth full week training sessions this is included. We look forward to a continuing relationship with AdaCore.
Now on to the New York theater and dinner report. We were able to see School of Rock on Broadway, it was in the upper tier of the shows I’ve seen. I can highly recommend it. My wife and son went to Hamilton while I was training, another great show on Broadway. We are also able to dine at the reopened Union Square Cafe. Awesome. On this visit the standouts were the pork entree and the calamari and polenta appetizers. Union Square Grill was the original Danny Meyer restaurant. Danny Meyer is considered the top restaurant proprietor in New York and is founder of the Shake Shack burger chain and is featured in Bo Burlingham’s bestselling business book Small Giants. If you go to New York try a Danny Meyer restaurant you will not be disappointed.
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