Return On Assets And Investment

The annual dividend is the total amount of dividends you could expect to receive if you held the stock for a year and there was no change in the company’s dividend payment. It is based on the current quarterly dividend payment rate projected forward for four quarters.

There was a time when a company not paying a dividend could expect to have its share price punished by virtue of the fact that many conservative funds looking for income rather than capital growth from their stocks would steer clear of such companies. Higher yields on stocks can suggest Wall Street expectations of sluggish growth.

The dividend yield is the indicated annual dividend rate expressed as a percentage of the price of the stock, and could be compared to the coupon yield on a bond. It allows you to see how much income you can expect per $ or £ investment from this stock, so allowing you to compare it with other stocks you may be looking at. Some prefer high yield, others low. If you are looking for high-growth companies as a general rule, all other things being equal, you will prefer low-yield companies.

The payout ratio tells you what percentage of the company’s earnings have been given to shareholders as cash dividends over the past twelve months. Look for stocks with a low payout ratio, which indicates that the company has chosen to reinvest most of the profits back into the business.There are a few sectors whose stocks are regarded as income vehicles utility and real estate in particular. Investors in these sectors focus more on yields than those in other sectors.

Management effectiveness

The management effectiveness is about return on capital. If you invest in government bonds, you would know you are going to get a certain return: the risk-free rate of return. Since investments in businesses are riskier, you would be expecting a better return than the risk-free one.

Return on equity

The shareholders of a company can be thought of as having given a company capital or equity. The return on equity (ROE) is a measure of how effectively the company has managed this equity. Equity represents that portion of the company’s assets that would be distributed to shareholders if the company were liquidated and all assets sold at values reflected on the company’s balance sheet, so it is what the company itself and therefore the shareholders own and does not include, for instance, money loaned from a bank.

Return on investment

Since return on investment (ROI) only relates to capital provided by shareholders, it is a limited measure of management effectiveness since we also want to know how the company is performing with the other sources of money at its disposal. Return on investment shows how effective management is in utilizing money provided by the company’s owners (equity) and long-term creditors.

Return on assets

As well as shareholder capital and long-term money granted to the company, there are also shorter term loans of capital, and so return on assets (ROA) is a broader measure than the above two of how a company is handling funds provided to it. For example, an internet company may borrow money to purchase some Sun Microsystems routers for its website. The lender may be providing short-term credit. Return on assets measures management’s effectiveness in using everything at its disposal to produce profits.

Profitability ratios relate to how much of the revenue the company receives is being turned into profit. Gross margin shows you what percentage of each revenue dollar is left after deducting the direct costs of producing the goods or services which in turn bring in the revenue. For a services company, the most common direct costs would be employees salaries.

The money left at this stage is called gross profit. Gross margin expresses the relationship between gross profit and revenues in percentage terms. For example, a gross margin of 10% means that ten cents out of every revenue dollar are left after deducting direct costs.

Operating profit and operating margin follow the progress of each revenue dollar to another important level. From gross profit we now subtract indirect costs, often referred to as overheads. Examples of overheads would be the costs associated with headquarters’ operations: costs that are essential to the business, but not directly connected to any single individual product manufactured and sold by the company.

Finally, net profit and net margin show you how much of each revenue dollar is left after all costs, of any kind, are subtracted, such as interest on corporate debt and income taxes. High margins are better than low margins, and this applies equally when comparing companies in the same industry.