Jakks sells at a price – to – earnings ratio of about 12 and a price – to – sales ratio of about 1. The company has grown quickly. Over the past five years, revenue has grown at an annual rate of about 25%. Shareholders haven’t enjoyed the full benefits of that growth, because of share dilution – but, that’s something best left to a longer discussion of Jakks. The point here is simple.

Jakks may not be anything special as a toy company, but it is a toy company. Jakks’ past return on assets proves that simply being a toy company is something special. Jakks’ "normal" ROA of around 5 – 12% may be nothing extraordinary in the toy business; but, it is far more than what most businesses earn. If there will be any future growth at Jakks, the current P/E of 12 will be shown to have been utterly ridiculous.

If you screen for high returns on equity, you might have missed Jakks. But, if you screen for high returns on assets, you’d have caught this apparent bargain. By the way, I believe Joel Greenblatt’s magic formula would have lead you to Jakks as well.

Village Supermarket (VLGEA) is another stock that has often earned a good return on assets, but has failed to ever earn a high enough return on equity to get much attention. This business is not as cheap as it once was; but, it isn’t exactly expensive at these prices either. For at least five years now, Village has looked quite clearly like it should be valued as a mediocre business. That’s saying something, because the market has continually valued VLGEA as a sub – par business; which it isn’t.

In 2000, you could have bought VLGEA at a 50% discount to book value. In 2001, the average buyer still obtained shares at a greater than 25% discount to book value. By then, anyone who had been monitoring Village’s return on assets for the previous five years would have known the stock was cheap.

For the last ten years, Village’s return on equity has been nothing more than average; however, the performance of the stock has been anything but average. An investor with one eye on Village’s price – to – book ratio and the other eye on Village’s return on assets would have enjoyed the decade long climb without breaking a sweat.

Another one of my favorite high ROA stocks is CEC Entertainment (CEC) – better known as Chuck E. Cheese. Recently, the stock has earned a good return on equity. However, a simple screen based on ROE would have brought a lot of less than wonderful businesses to your attention along with Chuck E. Cheese.

Return on assets told a different story. Chuck E. Cheese has consistently earned an extraordinary return on assets for the last decade.

Now, it’s true that Chuck E. Cheese has earned a very nice return on equity as well. But, if you're an investor who knows what normal ROA numbers look like, one look at CEC's return on assets will blow you away.

Debt can play the role of the fairy godmother. So, an investor needs to look beyond the veil of current performance. Return on assets can often provide a glimpse of what the stroke of midnight will bring. ROA is just one piece of the puzzle. But, it’s an important piece nonetheless.

A high return on assets doesn’t guarantee quality. However, I’ve found that Mr. Market has usually offered many more small, growing companies with extraordinary returns on assets than he has offered small, growing companies with extraordinary returns on equity.

Therefore, just as a general manager might want to run a quick screen for a high HBP number, you may want to run a quick screen for a high ROA number. I know it’s not supposed to be the best indicator of a bargain. But, in my experience, it tends to turn up a lot of neat ideas.

Obviously, a high return on equity is important. I’m not saying it isn’t. I’m just saying a high return on assets is more important than you think.

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