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Adding Return on Assets as an “Evaluate Management” metric when studying bank stocks

According to many resources, Return on Assets (ROA) is one of the best ways to evaluate profitability of a bank. %Pre-tax Profit on Sales is less useful when evaluating a bank, so I would suggest replacing that line with ROA for banks.

The calculation is done in one of 2 ways:
Return on Total Assets (ROTA) = CY Net Profit / CY Total Assets
Return on Average Assets (ROAA) = CY Net Profit / ((CY Total Assets + PY Total Assets)/2)

Where CY = current year; PY = previous year

Both are used. ROTA would result in a more conservative (lower) number than ROAA for a high quality bank that was growing assets year-over-year. ROTA is what Value Line reports for bank stocks.

I would recommend that we use ROTA as this is a simpler calculation. Like Profit margin (and ROE), consistency is important for ROA. Also like ROE, a value of 1.2% or higher is cited as a benchmark to identify a high-quality bank.

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    BetterInvestingAdminBetterInvesting (BetterInvesting, BetterInvesting) shared this idea  ·   ·  Admin →

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