Well Use of Assets By the Management
Whenever investors intend to make an investment, they are often in search of metric number or magic number that may help them to discover the greatest stock on the market. But such kind of magic never seem to work.
These metrics or numbers may be used as a qualifier for determining the stocks, but you may use them to eradicate poor performers.
When you consider buying a stock actually you are thinking about a number of stocks so, you must look at the broader picture.
Return on Asset
“ROA” stands for Return on Assets , it is an important metrics about which every investor should have sound knowledge. It is a tool by which you can judge whether a company is profitable or not.
ROA gives you information how any company competently or incompetently turns your assets in net income.
When you indent to make an investment only consider those companies that take capital from you and return profits to you. That’s, Return on Asset , which makes you able to see how any company does this efficiently.
The companies that are efficient in converting your assets into profits, are attractive for the investors.
Net margin as well as asset turnover are important components on which ROA is built. When you use them together , they tell the whole story.
When we separate net income from sales, net margin is good. Net margin tells percentage of a dollar into sales and company hold.
The other element is asset turnover, by which you can have an idea about how a company produce sales of assets. When you divide sales by assets , you are able to find asset turnover.
When you get net margin and asset’turnover , multiply them to determine RAO. Now you have had an idea how efficiently a company may convert your assets into profits. The company which has a high ROA is more efficient in using your assets to produce profits.
You can easily calculate Return on Asset for yourself. If you do not calculate it by self, however , there are some Web sites that provide assistance to calculate the “Return on Asset” for you. The Web Site “Morningstar ” offers ROA calculation to you. If you do not calculate it by self , however , you must have knowledge how the metrics can be generated.
Return on Asset presents two choices by that companies can improve their efficiency.
BY improving RAO companies can raise its prices as well as create high margins. It is pertinent to mention here that compare companies of the same sector. Some industries have had traditionally higher turnover or margins than other industries.
Return on asset is definitely an important tool of measurement for using and understanding , but it has also a flaw .The metrics do not judge the effect of leverage money. Borrowed money which is also known as leverage money in the market terms.