Infulence Of Return on Assets ROA Ratio

Stock is one of the greatest tools ever invented for building wealth. But parallel to the possibility of gaining, there is a great possibility of loosing. The only thing that can protect one from loosing is knowledge about movements in stock prices. Unfortunately, there is no clean equation that can tell us exactly how a stock price will behave, but we can try to find some factors that cause stock prices go up or down.

If we have a look at stock prices, we can see that for big and well-known corporations stock prices are very high, for small companies they are much lower. That means that one of the factors that determine stock prices is financial position of the company.

We assume that analysis of the data from the annual report of the company can help us to gain a better understanding of the connection between company’s financial position and change in the stock price.

In this paper we are going to compare the change in Return on Assets ratio (ROA) and stock prices.

Problem formulation

In the analysis part of the project we will try to answer two following questions:

 What is the connection between ROA and stock prices?

 How can change in ROA affect stock prices?

Concepts and definitions

Shares represent a claim (dividends) on a portion of company’s earnings.

Share price is the price of a single share of a company’s stock. They change every day as a result of market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock than sell it, then the price moves up. Conversely, if more people want to sell a stock than buy it the price would fall.

Financial statements are formal records of a business’s financial activities. These statements provide an overview of a business' financial condition in both short and long term.

“The objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions.”

Financial ratios are ratios of selected values on an enterprise's financial statements. They are good for comparing and investing the relationships between different pieces of financial information. Using ratios eliminates the size problem because the size effectively divides out.

There are several groups of financial ratios: liquidity ratios, financial leverage ratios, turnover ratios, profitability ratios and market value ratios.