Return On Assets
The Formula is ROA= (Net Income)/ (Total Assets) With this formula you will need to use both debt and equity to calculate assets. This is because you want to find out what return the company can make for every dollar they have. If you have a company that had a net income of $2 million and had $10 million worth of assets the ROA would be ($2 million) / ($10 million) or 20%. The higher the number is the better. So a company with a 20% Return on assets can be a better buy then a company with only a 5% ROA. This does not tell the whole story however, to make a good decision you must also compare that number to other companies in the same industry group. One industry group such as an airline which has very expensive assets that they need to buy to run their business will not have as high of a ratio as movie theaters which needs to spend a lot less money to make their profit. If a company has a ROA of 6% but the industry average is 3% then that company is doing well when compared to its competitors making it a good investment.
Other Financial Ratios Looking at many different ratios can give you an idea of how strong a company is overall. Here are a a few other financial ratios which people will look at. PE Ratio - This ratio compares the company’s earnings with the price of the stock. Debt to Equity Ratio – This ratio looks at the amount of debt which a company has and its shareholder equity. Accounts Payable Turnover Ratio – This Ratio can help you tell how long it will take for a given company to pay off its suppliers. |
