How To Assess the Performance Of An Asset

Measuring the performance of an asset means looking at whether the investment is doing well and is worth keeping in your portfolio. The phrase is sometimes used when speaking about the performance of a company, while other times it might refer to the performance of the company’s stock price.

Company Performance

Different company metrics can shed light on how the company is performing in comparison to others in its industry. These tools include numbers like:

  • Cash conversion cycle- a metric that measures the time it takes a company to start with cash, produce inventory, sell the inventory, and hold cash again.
  • Return on assets ratio- a metric that measures the ratio between the amount of profit a company makes and the total number of assets the company holds.
  • Fixed asset turnover rate- a metric found by dividing the number of total sales by the total number of company property, plant, and equipment (fixed-asset investments). 

Assessing performance of a company could mean comparing these metrics against the average numbers for the industry, or it could mean noting whether the metrics are showing an improvement from a period of time. For example, a company that finds a way to sell their produce faster may improve their cash conversion cycle outlook.

Return on Equity

One potential way to assess the performance of an asset is to look at the returns earned since the asset was purchased. This can manifest in different ways, such as regular dividends or an increase in the value of the stock. An investor might be pleased with the performance of their asset if it performs as expected in accordance with his or her investment strategy.

Investing Is More Than Metrics

Two investors studying the metrics of the same company may disagree on whether or not the asset is performing well. That is because measuring the performance of an asset means more than consulting numbers. Assessing performance means understanding how the asset fits into your investment strategy, what role it plays in your portfolio, and whether or not it is performing as expected.

A company that focuses on shareholders could choose to release regular dividends instead of investing profit back into the company with the goal of growth. Another company could focus solely on investment and make no promise of dividends to their shareholders. These choices may influence whether or not an investor is satisfied with their asset performance.