You know the term asset from the balance sheet. Yes, it's the stuff on the left if you missed class that day. Its earning power is a calculation of pre-tax earnings divided by total assets.
The "why should I care" overlay here is that some industries and/or companies operate with capital needs very different from one another. Extremely high contribution margin companies who don't have tons of fixed costs or massive initial capital needs can have extremely high asset earning powers. You find those companies dotted along the periphery of Stanford University, where all of their assets are intellectual assets, and they make computer software.
Google, with only one hundred million dollars of assets, created a company with some half a billion dollars of earnings power just a few years later. Extremely efficient asset and industry there. The opposite is an industry like the paper and pulp biz, with enormous capital cost, government regulatory maintenance, and other elements compressing earnings relative to very high cost total assets.
Related or Semi-related Video
Finance: What is Return on Sales (ROS)?3 Views
Finance allah shmoop what is return on sales or r
o s This is your return This is your return
on sale Any questions Oh i see a lot of
hands raised Ok then return on sales are roos is
an investment metric which basically reflects how profitable a company
is that is return here is profits and sales is
well the stuff you sold so return on sales is
a profitability index It speaks to how profitable and given
industry or company runs take wear hauser the paper and
pulp company that kills trees and makes them into paper
in a good year They have five billion dollars in
sales and profits of two hundred fifty million Really low
profit margin business especially when you consider that so many
years are well not good But the google search biz
well it's a bunch of servers and algorithm and not
much else So in a given year on sales of
twenty billion box it'll have returns of something like fifteen
billion pretax The basic notion is that you will see
the term return on a ton of other terms like
return on capital return on assets return on equity and
almost always the return that they're referring to There is
profits or earnings And from that ratio of return on
whatever in this case return on sales Investors can impute
a profit margin just a fraction which then derives the
valuation and or various other metrics Important toe Understanding a 00:01:33.812 --> [endTime] given security investment that's Why we study it
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