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2.2.
Financial Ratios and Dividend
2.2.1.Return on Asset (ROA)
Return on asset
is described as
how
much currency
unit a company earns by
operating
on
every
currency
unit
the
company
owns
in
its
asset.
It’s
given
by
the
formula:
Return on
Asset
is an
indicator of
profitability
of
the business
(DeAngelo et
al,
2006).
Their
research
on
empirical
data
also
concludes
that
higher
firm
profitability has
influence
on
the
dividend
payment.
According
to
Lintner
(1956),
profitability (along with the previous year payment) affects the dividend payout of the
firm.
He
conducted
the
study
on
28
U.S.
firms
and
found
that
the
two
factors
did
positively influence the dividend payout ratio of the firms.
There’re few things to be of concern if using ROA. The most obvious concern
is
that
ROA
may contain
non-operating
incomes
such
as
sale
of
assets,
currency
profit/loss,
and
other
posts
that
may be
permitted
to
be
recorded
as
income
by
accounting standards. Thus
it can be argued that ROA does
not reflect the company’s
operating
profitability.
However,
ROA
does
represent
the
company’s
profitability
as
a
whole
(operation
and
non-operation-related incomes).
Even
more,
positive
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