May
13

Free Guide – Investment Basics

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The first thing for you to know is that Return of Asset (ROA) refers to earnings of a company that was generated from capital that was invested. The other important thing for you to keep in ind is that the debt and equity of a company are its assets and they are used for funding the company operation. ROA numbers are vital to investors due to the fact that it gives an indication on the efficiency of the company in converting the money invested into net income. As the company earned more money with less investment, it reflects a good performance of the company.

Let’s have a small example. Well, in the case the company has a net income of US $2 million and a total asset of US $10 million, the ROA would be 20%. And in the case that the other company in the similar industry earned the similar amount and has an asset of US $20 million then its ROA will be 10%. As a matter of fact, it will portray that the company that has a ROA of 20% is better in handling their investment and converting them into profits. It should be also pointed out that it is never an easy thing for the management to make good profits while limiting their investment exposure. And that is the reason why a company having a higher ROA is definitely a good comparative measure against a lower ROA of a company in the similar industry. As you see such ROA is a very valuable figure in finding a great company for investment.

Now, let’s have a few words about Return of Equity (ROE). ROE indicates the amount of profits that a company is generating with the money that the shareholder has invested in them. It is a vital figure, which is used for comparison of the company’s profitability with that of another company in a similar sphere of industry. It is an indicator that the company has sustainable competitive advantage and should lead to higher share price for the company down the road.

It will be useful for you to know that following formula, which it can be derived by:

(ROE) = net income / Total shareholder’s equity multiply by 100.

It should be added that the normal benchmark for ROE figure is 12%and above. So, companies that were able to generate ROE of 15% or more are considered as very good investment but they are quite difficult to achieve. It is necessary to be able to find both the ROA and ROE figures in company’s annual reports under financial performances or summary. Because of this reason investors should look very thoroughly at these two factors before making a decision that concerns adding on that stocks into your portfolio.

P.S. Learn why people started to invest into silver bullion bars.
Read how to be smart in forex investment.
Read the review of HYIP PanaMoney done on the niche monitoring site.

Categories : Forex Trading