Ratios for Business Decision-Making: Part 2 – Profit Margin, Asset Turnover & Equity Multiplier

In our previous post, we dug into Return on Equity (ROE) and Return on Assets (ROA) to see how efficiently a company uses both its equity and its assets to generate profits. Now, we’re continuing the conversation by examining three more ratios—Net Profit Margin, Asset Turnover, and the Equity Multiplier—to deepen our understanding of how a business balances profitability, operational efficiency, and leverage.

To practice the exercise, we will be using NVIDIA Corp. 2024 Financial Statements as find on EDGAR or NVIDIA website.

Net Profit Margin

Net Profit Margin reveals how much of each dollar in revenue remains as profit after accounting for all expenses. A higher margin can reflect strong product positioning, economies of scale, effective cost management, or even tax optimizations. Conversely, a lower margin might point to rising costs or intensive competition.

Formula:

$$\text{Net Profit Margin} = \frac{\text{Net Income}}{\text{Revenue}}$$

NVIDIA Example

• Fiscal Year Ended January 29, 2023
  • Net Income: $4,368 million
  • Revenue: $26,974 million
  • $$\text{Net Profit Margin} = \dfrac{4{,}368}{26{,}974} \approx 16.2\%$$
  • For every dollar of revenue NVIDIA sold in 2023, they kept 16.2 cents in profit.
• Fiscal Year Ended January 28, 2024
  • Net Income: $29,760 million
  • Revenue: $60,922 million
  • $$\text{Net Profit Margin} = \dfrac{29{,}760}{60{,}922} \approx 48.8\%$$
  • For every dollar of revenue NVIDIA sold in 2024, they kept 48.8 cents in profit.

From these figures, NVIDIA’s net profit margin soared year over year, suggesting that for every dollar of sales in 2024, the company kept a lot more of it as earnings.

Asset Turnover

Asset Turnover measures how effectively a company uses its assets to generate revenue. A high turnover might mean quick collection of receivables, tight inventory management, or investments in cost-efficient operations. The key idea is how many dollars of sales you get per dollar of assets.

Formula:

$$\text{Asset Turnover} = \frac{\text{Revenue}}{\text{Total Assets}}$$

It’s also useful to remember:

$$\text{ROA} = \text{Net Profit Margin} \times \text{Asset Turnover}$$

In other words, Return on Assets combines how much profit you make on each dollar of sales (net profit margin) with how many sales you can produce per dollar of assets (asset turnover).

NVIDIA Example

• Fiscal Year Ended January 29, 2023
  • Revenue: $26,974 million
  • Total Assets: $41,182 million
  • $$\text{Asset Turnover} = \dfrac{26{,}974}{41{,}182} \approx 0.654$$
  • For every dollar NVIDIA invested in its assets in 2023, they generated 65.4 cents in revenue.
• Fiscal Year Ended January 28, 2024
  • Revenue: $60,922 million
  • Total Assets: $65,728 million
  • $$\text{Asset Turnover} = \dfrac{60{,}922}{65{,}728} \approx 0.926$$
  • For every dollar NVIDIA invested in its assets in 2024, they generated 92.6 cents in revenue.

Here, we see a jump in asset turnover, indicating that NVIDIA not only expanded its asset base but also used those assets more productively to drive revenue growth.

Equity Multiplier

The Equity Multiplier indicates how many dollars of assets the company has invested relative to each dollar invested by equity investors. From an equity holder’s perspective, a higher multiplier often suggests that operations are being leveraged to increase returns—assuming the business remains profitable.

Formula:

$$\text{Equity Multiplier} = \frac{\text{Total Assets}}{\text{Shareholders’ Equity}}$$

There’s also a relationship with Return on Equity (ROE):

$$\text{ROE} = \text{ROA} \times \text{Equity Multiplier}$$

NVIDIA Example

• Fiscal Year Ended January 29, 2023
  • Total Assets: $41,182 million
  • Shareholders’ Equity: $22,101 million
  • $$\text{Equity Multiplier} = \dfrac{41{,}182}{22{,}101} \approx 1.86$$
  • For every dollar that the owners have put in the firm, NVIDIA has deployed $1.86 of assets.
• Fiscal Year Ended January 28, 2024
  • Total Assets: $65,728 million
  • Shareholders’ Equity: $42,978 million
  • $$\text{Equity Multiplier} = \dfrac{65{,}728}{42{,}978} \approx 1.53$$
  • For every dollar that the owners have put in the firm, NVIDIA has deployed $1.53 of assets.

The Equity Multiplier dipped from 1.86 to 1.53, which tells us that even though NVIDIA’s total assets increased, shareholders' equity grew at a faster rate.

Net Profit Margin and Asset Turnover Explain the ROA Surge

1. Net Profit Margin jumped from roughly 16.2% in 2023 to 48.8% in 2024.
   • This huge increase helps explain how net income soared (from $4.37B to $29.76B), giving a major boost to both ROE and ROA.
   • It suggests NVIDIA has either optimized costs, significantly raised prices, introduced highly profitable products, or benefited from favorable market dynamics—likely a combination of factors.
2. Asset Turnover rose from about 0.66 in 2023 to 0.93 in 2024.
   • Even as total assets expanded from $41.2B to $65.7B, revenue growth (from $26.97B to $60.92B) outpaced that increase.
   • Higher Asset Turnover indicates more efficient use of those assets, driving up the ROA to 45.2% (from 10.6%).

By definition, ROA = Net Profit Margin × Asset Turnover. So a leap in both margin and turnover naturally pushes ROA to a much higher level.

Equity Multiplier’s Impact on ROE

• Equity Multiplier (1.86 to 1.53): Indicates that shareholders' equity grew faster than total assets, reducing the number of assets per equity dollar but still supporting strong ROE through operational success.

Does This Address Our Key Questions?

• “What fueled the surge in net income?”
  • The high Net Profit Margin offers a huge clue: NVIDIA’s profitability on each dollar of sales skyrocketed, possibly due to a combination of strong pricing power, booming demand (e.g., AI/data centers), or cost efficiencies.
• “Is asset growth sustainable?”
  • The robust Asset Turnover suggests that as assets grew, revenues grew even faster. So far, that’s sustainable in the data, but one would still check management commentary to confirm if it’s an ongoing trend or a product of special circumstances.
• “How does this compare to peers?”
  • Knowing that the Equity Multiplier declined while profitability measures soared might indicate NVIDIA’s strategy differs from other tech/semiconductor firms that might be more leveraged. A peer-to-peer comparison would confirm if this is a broader industry shift or something NVIDIA-specific.

Looking Ahead

So far, the data shows NVIDIA dramatically improved its efficiency (Asset Turnover) and profitability (Net Profit Margin), driving up both ROA and ROE.

Whether this level of performance is sustainable or a one-time leap remains an open question—something we might explore further when we look at Liquidity and Solvency in our next discussion.

Until the next one,

J