TAKING ADVANTAGE OF THE NUMBERS: RETURN ON ASSETS (ROA)

Return on assets (ROA) is a measurement of management performance; it tells investor/speculator how well a company uses its assets to generate income. A higher ROA indicates a higher level of management performance. Technically speaking, a company should always yield an ROA higher than the risk free rate of return, if the company’s ROA is less or equal to the risk free rate, a speculator is better off purchasing FGN savings Bond which has a guaranteed yield.

The greatest challenge for most individuals is the identification/ differentiation of an asset from a liability but as a number savvy investor/speculator this should be a no-brainer, What makes an asset or a liability is in the numbers, and your ability to read and take advantage of the numbers is a key fundamental to being successful at this game. 

Take a look at the return on assets of some NSE listed food products companies

	Cow 1	Cow 2	Cow 3	Cow 4	Cow 5	Cow 6
2012	-2.92	13.24	2.83	5.82	-0.65	25.88
2013	-5.30	15.54	1.74	5.13	6.21	23.62
2014	-7.77	12.24	0.02	5.25	7.15	14.87
2015	-30.38	11.86	2.02	1.64	-8.23	12.92
2016	8.44	8.10	2.71	-3.98	-11.34	10.00
AVERAGE	-7.59	12.20	1.86	2.77	1.37	17.46

As a financial speculator I like to view myself as a dairy farmer and the  asset class/companies I invest in as dairy cows, so as a dairy farmer, which cow would i rather own? That should be a no brainer, numbers don’t lie, the cow with consistent double digit return on assets. These cows feeds on the same pasture, drink the same water and lick the same salts but yet produce different quality and quantity of milk, cows are animal of habits and habit are in the DNA, these cows will keep on doing same thing over an extended period of time, just watch them for five years at least and you can tell how the next five years will be like.

 The main gist about ROA

Only buy companies that have high and consistent return on asset preferably in double digits

ROA is indicative of what has been done with the asset that is available to the company.

Note:

Cow 2 is Dangote sugar refinery, Cow 6 is NASCON allied industries.