The Power of Quality. ROA, Key Performance Indicator?

June 3, 2021

U.S. Large Caps

Profitability is the objective for all companies so though it may be intuitive that the most profitable companies in the S&P 500 have also been the best performers, the margin by which they have outperformed may come as a surprise.

Using return on assets (ROA) as a measure of profitability, the top quartile of companies in the S&P 500 have generated an average 5 year annualized return of nearly 20%, more than double that of the companies in the 4th quartile by ROA.

NameYieldDPS Growth 2018Net Debt to EBITDADividend Coverage Ratio
Dividends2.45%20.90%2.002.2
MLPs8.50%-7.70%4.200.9
REITs3.58%1.00%5.971.0

Source: Bloomberg Finance L.P., data as of 03/31/2021. Past performance does not guarantee future results. The referenced index is shown for general market comparisons and is not meant to represent the O’Shares Funds. Investors cannot directly invest in an index.

Definitions:

1st Quartile: Contains the top 25% of companies in the S&P 500 based on average 5-year return on assets.
2nd Quartile: Contains the top 25%-50% of companies in the S&P 500 based on average 5-year return on assets.
3rd Quartile: Contains the top 50%-75% of companies in the S&P 500 based on average 5-year return on assets.
4th Quartile: Contains the bottom 25% of companies in the S&P 500 based on average 5-year return on assets.

ROA (Return on Assets): Indicator of how profitable a company is relative to its total assets, in percentage. Calculated as (Trailing 12M Net Income / Average Total Assets) x 100. Higher ROA: Defined as companies with ROA that is above the average for the sector. Lower ROA: Defined as companies with ROA that is below the average for the sector.

Related Content

OUSA: Waiting for Pullbacks Could Prove Costly

OUSA: Waiting for Pullbacks Could Prove Costly

Aside from the global pandemic, OUSA suffered only 1 pullback greater than 10% in the past 3 years. Investors waiting for a pullback to invest could have missed big returns. 13.5% annualized 3-year return: OUSA generated a cumulative return of 46% for the 3-year...

S&P 500 Sector Scatterplot: Risk vs. Return

S&P 500 Sector Scatterplot: Risk vs. Return

Comparing 10-year return and risk data for the 11 sectors in the S&P 500, several observations can be made. The sectors with the lowest volatility in the past 10 years were Consumer Staples and Health Care. The highest volatility sectors were Energy and Financials....

Our Next Livestream Starts In

O’Shares Livestreams are usually on Thursdays at 11AM ET. Topics include current market investment themes and internet and dividend related research.

Subscribe to O'Shares Research

Investing in ETFs starts with understanding it. O'Shares publishes original research, subscribe for access to exclusive content and industry insights.