Trying to find a company that you can check off every item on your stock expectation list? This can be close to impossible. Some of the most important items to look for are solid assets and reserves. How can you tell if a company’s assets will benefit you as an investor? Isac Simon has three main tips to keep in mind.
Here, we’ll find out whether a given company’s assets are profitable and efficient compared with its peers based on some important metrics:
- Return on assets, or net income divided by total assets. This metric shows how much the company is earning compared with the assets it controls. The ratio is an indication of how effectively the company is converting the money it has invested in reserves, property, and other equipment into net earnings. The higher the value, the more profitable the assets are. The metric is pretty useful when used as a comparative measure — against peers and also against the industry in general. A value greater than 5.0% is what investors should be looking for in this industry.
- The fixed-asset turnover ratio, or revenues divided by total fixed assets, such as plant, property, and equipment. Fixed assets form a major chunk of total assets for companies in this industry, and this metric shows how efficiently the company is using its fixed assets to generate revenues. The higher the turnover rate, the better. A value of 0.55 looks pretty good.
- Total enterprise value/discounted future cash flows, which shows how expensive the company is when compared against its standardized future cash flows. The denominator indicates the total present value of estimated future cash inflows from proved reserves, less future development and production costs, discounted at 10% per annum. It’s based on today’s energy prices and doesn’t account for unproven reserves.