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.
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Finance: What is contribution margin?12 Views
Finance a la shmoop... what is contribution margin, well, shmoop has spent a fortune
building the oh so fine content you digest and then mostly for free and you [Girl watching Shmoop videos]
could pay us if you wanted to..For years we've made no operating profit choosing
instead to roll any excess cash we found in our cigar boxes into building more
content so while our operating margins ie the cost of running the entire
business paying our writers, our clowns, our rent, our cloud storage facilities the [Clown bouncing on the spot]
office jester we have on retainer permanently to entertain the writers
have been low or nearly zero our contribution margins are really high
that is our cost of serving another thousand pages which you view hungrily
clicking on our ads thank you very much that cost to us is well something less [Person holding half a penny]
than a penny but we sell it to advertisers for a thousand page views
and about three bucks a unit there thousand pages for three bucks what a
deal so the contribution margin of that additional n plus one unit of our
product a thousand page views is extremely high like $2.99 divided by
three dollars or well over 99% contribution margin those are
our contribution margins here at Shmoop, very very high and not all companies [Man discussing contribution margins]
have such high contribution margins our sister company robot-date-eat-pray-
love which manufactures emotionally deep robots designed to take the place of [Emotional robot walking with a woman]
well you know special friends well they sell their robots for 15 grand each
but their cost of building that robots really high like 12 grand each no matter
how many robots they make so RDEPL carries a contribution margin of just 15
minus 12 or 3 grand / 15 grand or about 20 percent sorry all these numbers may
sound a bit tedious but if you're on a date with the robot they make for some
scintillating conversation [Girl sitting with robot on a date]
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