There are many ways for fundamental investors to gauge the profitability of a business, and one common method is looking at return on assets. Return on assets is simply a measure of profitability relative to the size of its business.
Return on assets is calculated by dividing net income by the value of total assets. Net assets include cash, receivables, inventories, capital equipment, land, and intellectual property.
Why Is It Important?
In practical terms, return on assets tells investors how well a company is using its assets, which is one way to consider a company’s efficiency. ROA varies widely from industry to industry, but it's an effective way of comparing multiple companies within the same business.
If one airline’s ROA is half of the ROA of its competitor, there may be ways to streamline the business to earn more income off of the assets on the balance sheet. At the same time, a low ROA can be a signal that a company needs to sell off some dead weight and dispose of assets that aren’t contributing to returns.
If ROA is trending positively over time, an investor can see that management is making improvements to the company’s business model. They can look at competitors’ ROAs to get a sense of how much additional room there is for improvement.
High ROA Stocks
Here are the 12 stocks in the S&P 500 that currently have the highest ROAs, according to Finviz:
- Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX), 36.2% ROA.
- Verisign, Inc. (NASDAQ: VRSN), 32.1% ROA.
- Texas Instruments Incorporated (NASDAQ: TXN), 30.6% ROA.
- Yum! Brands, Inc. (NYSE: YUM), 30.3% ROA.
- Mastercard Inc (NYSE: MA), 27.8% ROA.
- Intuit Inc. (NASDAQ: INTU), 26.5% ROA.
- ABIOMED, Inc. (NASDAQ: ABMD), 25.6% ROA.
- IDEXX Laboratories, Inc. (NASDAQ: IDXX), 25.1% ROA.
- NVR, Inc. (NYSE: NVR), 24.8% ROA.
- Copart, Inc. (NASDAQ: CPRT), 24.6% ROA.
- MarketAxess Holdings Inc. (NASDAQ: MKTX), 24.2% ROA.
- Electronic Arts Inc. (NASDAQ: EA), 23.8% ROA.
ROA can be a useful tool for investors to use to determine the efficiency of a business, especially within a peer group. However, to get the best possible understanding of a company’s fundamental valuation, smart investors never rely exclusively on any single metric.
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