CHAPTER 10

Stock Research Checklist—Capital Investment

Here is the calculation formula for return on assets (ROA):

Total assets consist of debt and equity.

This percentage gives you, the investor, the percentage of net income generated for the money invested, which includes both debt and equity capital. As long as the ROA is high, company shareholders will be greatly rewarded.

What Is the Company’s ROA for the Last 10 Years? Is It Growing Constantly or at Least Maintaining an Average ROA for the Last 10 Years?

Now, say for example, that Company X is generating $10 million of net income, and total invested assets (including debt and equity) equal $100 million.

Company Y is generating the same $10 million net income, and total invested assets (including debt and equity) equal $50 million.

Which company is better for the shareholders? Obviously, Company Y is the better choice because it generated 20 percent out of the total invested assets. As with many of the other checklist items, you need to compare the ROA with competitors in the same industry.

Now we can calculate the ROA for Coca-Cola (KO) and Goodyear Tire (GT). I understand that Coca-Cola and Goodyear are in different industries ...