01 September 2010

Fundamental Analysis: Return Of Assets, ROA, in a Stock Market Investment

In the term of definition of  Return Of Assets, ROA, is to evaluate the ability of a company to generate profit with a dollar of asset.

Therefore, ROA = (profit) / (assets)

But few questions exist here immediately, which type of profit should I refer to? and which type of assets should I refer to?

According to Wikipedia,

But, please be very careful when using ROA in evaluating a company. This is because you should be very careful about what type of assets a company has claimed as their total assets and what type of income as well.This is because ROA can be increased when either income is increased or total assets is decreased.

For example, investor should always focus on one-time dispose assets activity since it can immediately increase ROA value.

Next, ROA is different from business to business. Therefore, it is a good idea to company ROA with its competitors. For instance, business such as software company may have higher ROA compared to construction sector.

Lastly, remember to find out how the ROA of a company in last few years. Is it keep increasing? Is it
suddenly increasing more than 10%? And then, find out the reason behind of this matter.

Feel free to give me a comment about this topic. It will be a great support to Xaivier Blog.

Written by: Xaivier Chia

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