Calculating Return on Assets (ROA)

From The Hoss's Mouth

Return on assets (ROA) is a tool investors use to determine how competent an organization is at using its assets to produce earnings. There are two primary formulas for calculating ROA.

Method One: Net Profit Margin x Asset Turnover

Method Two: Net Income / Average Assets for the Period

Both methods are acceptable but the investor must make sure that s/he uses the same method when performing these calculations, otherwise when comparing companies the results may be skewed. Just like when calculating the win percentage of two horses in a race, a handicapper would not use a formula which calculates win percentage by using total wins divided by total races for one horse and a formula that uses total wins at today's distance divided by total races at today's distance for another. This type of comparison would not produce meaningful results.

Generally speaking, the higher the ROA the better, however remember that widely different industries produce widely different ROA's. Industries such as railroads are asset heavy and will have lower ROA's than asset light companies. So always compare companies that are in the same industries; to use an old cliche: compare apples to apples.

There are many free online financial services which provide you with ROA numbers for all companies listed on the stock exchange, therefore Money Magazine Hoss is not going to bore you with sample calculations. Why perform all these mathematical calculations yourself when somebody is doing it for you and for free? For example, a quick look at Yahoo Financial shows that Amazon has a ROA of 6.93%.

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Money Magazine Hoss

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Related Posts:
Calculating Asset Turnover
Calculating Return On Equity
Financial Statements Explained
The Balance Sheet
The Income Statement
Calculating Gross profit Margin
Calculating Operating Margin
Investment Strategy Dollar Cost Averaging
Market Timing
Calculating Net Profit Margin

Calculating Net Profit Margin

Calculating Net Profit Margin

From The Hoss's Mouth

Money Magazine Hoss continues his series on financial performance ratio calculations with today's post highlighting Net Profit Margin. This ratio tells the potential investor how much profit a company generates for every $1 of revenue. It is considered to be a measurement of a company's efficiency in converting revenue to profit. Investors normally prefer companies with a high net profit margin. Formula as follows:

Net Profit Margin = Net income/Revenue * 100 %

We will continue using the income statements of Amazon, GM and Google to provide examples.

Amazon's Net Profit Margin :

2006: $190,000/$10,711,000 * 100 = 1.8%

2007: $476,000/$14,835,000 * 100 = 3.2%

2008: $645,000/$19,166,000 * 100 = 3.4%



GM's Net Profit Margin:



2006: -$1,978,000/$207,349,000 * 100 = -9.5%

2007: -$43,297,000/$181,122,000 * 100 = -24%

2008: -$30,860000/$148,979,000 * 100 = -20.7%


Google's Net Profit Margin:



2006: $3,077,446/$10,604,917 * 100 = 29%

2007: $4,203,720/$16,593,986 * 100 = 25.3%

2008: $4,226,858/$13,174,044 * 100 = 32.1%


Once again, as in Money Magazine Hoss's previous financial indicator examples, when we compare the Net Profit Margin of the three companies, Google without question has the best performance.


Stay on Track,

Money Magazine Hoss

Next Hoss Cents Free Financial Money Magazine Post: Calculating Return On Equity
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Related Posts:

Financial Statements Explained

The Balance Sheet

The Income Statement

Calculating Gross profit Margin Calculating Operating Margin

Investment Strategy Dollar Cost Averaging

Market Timing

Calculating Gross Profit Margin Percentage

From The Hoss's Mouth

In today's post, Money Magazine Hoss takes a look at calculating gross profit margin percentage. He will compare the income statements of three companies: General Motors, Amazon and Google. In particular, we will concentrate on the total revenue and gross profit for the years 2006, 2007 and 2008, from which we can calculate the gross profit margin (GPM) for each company for each year.

Why is this number important? Generally speaking, high gross profit margins are considered to be the signs of efficient companies which tend to make decent profits. Investors favor this type of company and are usually willing to pay a higher price per share. This will be clearly demonstrated in our three examples.

Calculating Gross Profit Percentage is not difficult; it is simply Gross Profit divided by Total Revenue.

Let's take a look at the first at the first company Money Magazine Hoss has illustrated for you, Amazon:



Amazon 2006 GPM = 245,600/10,711,000 * 100 = 22.9%
Amazon 2007 GPM = 3,353,000/14,835,000 * 100 = 22.6%
Amazon 2008 GPM = 4,270,000/19,166,000 * 100 = 22.3%

Amazon's GPM has remained constant for the three year period at about 22.5%. A good figure.

Next, Money Magazine Hoss has prepared the GPM for General Motors for the same time frame:



General Motors 2006 GPM = 4,267,000/207,349,000 * 100 = 20%
General Motors 2007 GPM = 12,121,000/181,122,000 * 100 = 6.7%
General Motors 2008 GPM = -1,624,000/148,979,000 * 100 = -11%%

General Motors GPM has been a disaster. Over a three year period it has declined from 20% to a negative figure. Not a company Money Magazine Hoss would invest in.

The third and final company that Money Magazine Hoss selected for the sample three-year period is Google. Take a look:




Google 2006 GPM = 6,379,890/10,604,917 * 100 = 60%
Google 2007 GPM = 9,944,901/16,593,986 * 100 = 60%
Google 2008 GPM = 13,174,044/21,795,550 * 100 = 60%

Google's GPM has remained constant at a very high 60%, which is an excellent Gross Profit Margin.

It is obvious to all that if Gross Profit Margin Percentage was the only criteria an investor was to use in selecting a company to invest in, Google would be the choice. However, as mentioned in Money Magazine Hoss's previous post The Income Statement there are several other criteria which must be taken into consideration. We will be reviewing several of these in future postings.

The June 24, 2009 closing stock prices of Google $409.29, Amazon $79.27 and General Motors $1.11 should not come as any surprise based on their respective Gross Profit Margins. These closing stock prices confirm our statement above: that investors pay higher prices for companies with high Gross Profit Margins.

Stay on track,

The Hoss

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