When investing in the market, the more you know about the companies that offer stocks, the better decisions you can make on which to buy. Experts use a wide range of analyses and considerations, but most include "return on assets," or ROA, in their decision-making process. If a company doesn't publish its ROA, you can use other financial information to figure it out.
Shares of Stock
When you buy shares of stock in a company, you actually own a small portion of that company. In most cases, each share you own gives you one vote in the company's annual stockholder meeting. Keeping track of a company's financial activities may help you decide how to vote on certain issues, or if you want to vote at all. It may also help you make your decision on whether to sell the stock, hold it, or buy more.
Return of Assets
A company's ROA equals its net income divided by its average total assets. Its net income means basically its total profit for the year, and can be found on its income statement, which should be readily available to investors. Its average total assets means the value of everything it owns, and can be found on its balance sheet, which also should be available. According to Finance Formulas' Internet article, "Return on Assets," ROA "looks at the ability of a company to utilize its assets to gain a net profit.," and is stated as a percent.
A 2009 "Fortune" magazine article entitled, "The Fortune 40 -- How We Picked Them," explains many ways to pick stocks. For selecting small-cap companies -- those whose total outstanding shares are worth less than $1 billion -- the article rejects companies that have an ROA of less than 8 percent. Although this may not give you specific and usable information, it clearly shows that ROA is a significant statistic used by professionals. There is no way to exactly pick which stocks will actually increase in value.
Another Way To Calculate ROA
Another important statistic that professional analysts use is a company's "asset turnover ratio," which is found by dividing its total revenues -- instead of its net income -- by its average total assets. If you know a company's asset turnover ratio, you can calculate ROA by multiplying it by the net profit margin, which equals total revenues divided by total profits. Financial statistics only show how a company has been doing up until its latest annual report, and is no proof that it will continue operating in the same manner in the future.
Richard Asmus was a writer and producer of television commercials in Phoenix, Arizona, and now is retired in Peru. After founding a small telecommunications engineering corporation and visiting 37 countries, Asmus studied broadcasting at Arizona State University and earned his Master of Fine Arts at Brooklyn College in New York.