Jeremy Bendeich, CIO at Avoca Investment Management, explains why sustainable return on assets is a key ratio in his investment process

Jeremy Bendeich, CIO at Avoca Investment Management, explains why sustainable return on assets is a key ratio in his investment process. I like to look at sustainable returns on assets, (ROA). That is EBIT divided by Total Assets. Why? Low ROA business typically reflect either or both highly competitive markets or highly capital intensive industries. Companies that can create value to shareholders need to be able to add capital that earns a return above the cost of capital. Our long term focus in our valuations means that this is a crucial measure. Other ratios like a low PE, might attract us to investigate a stock, but our assumptions on sustainable ROA are one of our key valuation inputs.