|
ROA is another valuable tool
Return on
assets (“ROA”) measures how effective and profitable a company is in
utilizing its assets. ROA is calculated by dividing annualized net income by
average total assets and is expressed as a percentage.
ROA is an
informative tool use when evaluating and comparing companies in asset
intensive industries. It’s useful to investors when analyzing industry
trends. The banking and finance industries are good examples; they use a
variation of ROA, by tracking the return on average earning assets, as well
as their cost of funds for interest bearing liabilities. In most cases, the
higher the ROA, the better. An unusually high ROA percentage, however, can
also indicate that the company is taking an unacceptable or inappropriate
level of risk. |
