return on assets is important for investing in stockssimilair ratio to return on assets This is a very important financial ratio that is used to determine how well a company can use its Assets. It is calculated by taking net income plus interest and expenses divided by total assets. This is a very important ratio if you think about it because almost all companies make money off assets right? Real estate for the business, buying machines etc. This tells you what the company can do with what it's assets. This is very important since using what you have is the best option right? It is an indicator of how profitable a company is without borrowing any more money as well. It is especially helpful when you compare this ratio with a company competition. A higher number probably indicates that the company is 1.Buying better assets to make the company more profitable.2.They more purchasing power to buy BETTER assets3.They have some other competitive advantage that their competition doesn't which makes the company more efficient. This is an important ratio but should compared industry average of a given company so you can see how well a company manages it's assets compared to the competition. However a companies ability to achieve a high ROA still isn't enough to make it profitable or a good investment. Companies that have a huge return on their assets may have a lot of liabilities and debt that accumulates and offsets their return on the assets that they own. Also a company that's manufacturing things may naturally have a high ROA so be careful when investing in companies that have a good return on assets - be wary. investing in the stock market and in companies with good asset returnsAnother example of a company that I can think of that has had good ROA is Garmin Ltd. Again I checked on msnmoney for Garmin CLICK HERE This shows you that as of today they had way better return on assets for themselves then that of the industry average-their competition |