Started by RoboForex, Mar 05, 2022, 05:46 am
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This article is devoted to the market multiplier called ROA: what it is necessary for, how it is calculated, what peculiarities, drawbacks, and advantages it has, and how it can be used.
ROA (Return on Assets) is the multiplier that shows the profitability of assets. It expresses the ratio of the net profit and the average-weighted size of the assets, demonstrating the efficacy of using the capital of a company. It is expressed in percent.
ROA = Net Profit / Average Assets
Average Assets calculation formula:
Average Assets = (Assets 1 + Assets 2) / 2
Nowadays it is hardly necessary to calculate the ROA manually because this information is available in open sources.
The ROA differs depending on the sector in which the company works and the nature of its business. For example, in services, the ROA will be higher than in the oil industry.
The reason is the working capital that companies need for functioning and production. The more the company spends on development, the smaller ROA it will have over a calculation period.
The intermediate conclusion is that comparison by the ROA can be accurate and correct only for companies working in one sphere of business. And the higher the ROA, the better for the company and its investors.
Also, other selection criteria can be added. Stocks will be sorted out by price and average trade volume to exclude non-liquid instruments: less than $10 and more than 750,000 shares, respectively. Choose place - the US. The selection result is a list of 9 companies.
4. Go to the page with the financial characteristics of the companies and compare the ROA.
Two entities have a positive ROA: FLMN - 5.8% and CDEV - 6.6%. Others have negatives ROAs. This does not directly show they are losing but calls for more detailed analysis. Looking briefly, a company with a positive ROA looks more attractive for the investor.
On the screener page, specify the following: sector - finance, industry - banks, average trade volume - over 750,000 stocks, place - US. The selection result is a list of 5 companies.
All the companies for analysis have positive ROAs - from 0.9% to 1.3%. The prelim conclusion is that all the banks are good for investments.
Note that investment decisions should not be made just based on one multiplier. Complex analysis, including comparison of several multipliers and the financial history of companies is necessary.
Advantages of the Return on Asset multiplier:
Drawbacks of the ROA:
As many other multipliers, the ROA has its drawbacks and advantages. The multiplier can only give a prelim evaluation of the return on investments in the company, Optimum analysis should include several multipliers and financial reports of the company.
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