(Find Gross Profits in the Income Statement.)
(Find Total Assets in the Balance Sheet.)
Gross Profitability is a narrower metric that focuses on the company’s product, pricing, and costs. Since Gross Profit is a measurement from the top of the income statement, it can’t be distorted by other figures farther down the income statement.
Tobias Carlisle, in Deep Value provides evidence that this may be the best Return On Total Assets Ratio to single out stocks that can provide above average rates of return. (pg. 195)
4. EBITDA Return on Assets
EBITDA Return on Assets = EBITDA / Total Assets
EBITDA = Net Profit + Interest + Taxes + Depreciation & Amortization
(Find EBITDA in the Income Statement. Many financial statements will provide as a line item. Almost any financial service will provide as a line item.)
EBITDA Return on Assets measures how efficiently a company is generating EBITDA. This means capital structure, different tax rates, and different capex costs would not affect comparisons between companies. EBITDA Return on Assets has limited usefulness for most investors.
5. Return on Total Assets (ROTA)
Return on Total Assets (ROTA) = EBIT / Total Assets
Earnings Before Interest & Taxes (EBIT) = Net Income + Interest + Taxes
(Find EBIT in the Income Statement. Many financial statements will provide as a line item. Almost any financial service will provide as a line item.)
Return on Total Assets (ROTA) measures how efficiently a company is generating earnings before interest and taxes are paid. This means capital structure and different tax rates would not affect comparisons between different companies.
6. Free Cash Return on Assets
Free Cash ROA = FCF / Total Assets
Free Cash Flow = Cash Flow From Operations (CFO) – Capital Expenditures (Capex)
(Find Capex in the Cash Flow Statement. In many financial statements it will be labeled Property, Plant, and Equipment.)
Free Cash ROA measures how efficiently total assets are being used to produce cash for equity and debt stakeholders.
Return on Total Assets Ratios provide valuable information to value investors searching for quality companies.
This article has been republished with permission from Arbor Investment Planner.