Things You'll Need:
- Any company's Income Statement
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Step 1
The first thing that you will need to do is acquire a company's Income Statement. www.yahoo.finance.com is a good place to find this data. I will be using Wal-Mart's Income Statement in this example.
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Step 2
Now lets look at the Return on Assets profitability ratio.
Return on Assets(ROA) = Net Income / Average Total Assets -
Step 3
In this calculation we will need to have both the company's Balance Sheet and Income Statement handy. The net income value can be found on the income statement. It should be noted that if a company had a negative value for net income ROA will not be able to be calculated. To find the average total assets refer to the balance sheet and make sure that you are looking at the company's quarterly financial data. Simply add the Total Assets value for each quarter together and divide by 4(Qrts.)
WMT Data:
Net Income - 12,731,000
Average Total Assets - 163,252,500 -
Step 4
Now just plug our data into the formula presented in step 2.
12,731,000 / 163,252,500 = .078 -
Step 5
What does this mean? It means that if WMT's net income was generated from the total value of assets, the return would be right around 8 cents per dollar. It is also a great indicator of how efficient WMT is at using their assets to generate income. From everything that I have studied eight percent is pretty low.
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Step 6
Now lets introduce another profitability ratio known as Return on Equity. Once again you will need to use both the Income Statement and Balance Sheet to find this ratio. You will need to find the Net Income value(Income Statement) and the Avg. Shareholder's equity for the year(Balance Sheet). To calculate this obtain the total stockholder's equity value for the past four quarters and divide by 4.
Return On Equity(ROE) = Net Income / Average Shareholder Equity
WMT Data:
Net Income - 12,731,000
Average Shareholder Equity - 63,300,750 -
Step 7
Now plug in data to the formula presented in step 6.
12,731,000 / 63,300,750 = .201 -
Step 8
What does this mean? This figure tells us how much profit WMT has generated from money that has been invested by investors. 15-20% is usually considered exceptional. For every dollar of income 20 cents can be credited to the investors capital. This ratio is often considered the most important because what is the main goal of any corporation? "Maximize shareholder wealth." Just like with any other analysis make sure you compare industry averages to the values of the company you are evaluating.
