Return on Assets

Today we discuss another way to measure the company's health. ROA or Return on Asset is used in stock trading's fundamental analysis. It may not necessarily say whether the company will do good but it is a good indicator nonetheless. 

The return on assets (ROA) measurement is a calculation of a company's efficiency of use of tangible assets. The ROA does not show how the stock is performing in the stock market; rather it shows how well the company is performing for retail customers. It is calculated by the following formula:

                            (Net income + Interest expense) / (Total assets)

After tax earnings (your net income plus interest expense) divided by total assets gives the trader a look at how efficient a corporation is.As ROA increases, the company is financially sound. The opposite is also true; a falling ROA means that a company is not earning as much as it could be through customer-based revenue and, if it has not occured already, its stock may be about to drop. It is important that a company performs well in the stock market, but if the company does not fulfill customer needs, it is going to fail eventually.