Glossary
Return on assets (ROA)
Net income divided by total assets: how much profit a company generates from everything it owns, regardless of how it is financed.
Return on assets (ROA) measures how much profit a company earns for each dollar of assets on its balance sheet. Because assets are funded by both debt and equity, ROA shows how productively management uses the whole resource base, before the effect of leverage. It is especially useful for comparing companies in asset-heavy industries such as banking, manufacturing and retail.
How it works
Using the average of beginning and ending assets smooths out the effect of acquisitions or big swings during the year. Some analysts add after-tax interest expense back to net income so the result is not affected by how much debt the company carries.
How to read it
ROA links two things: margins and asset turnover.
A grocer with a 2% net margin that turns over its assets 3 times a year has an ROA of 6%. A luxury goods maker with a 15% margin and turnover of 0.5 has an ROA of 7.5%. Different business models can reach similar results by very different routes.
Limits to keep in mind
- Compare within an industry. Typical ROAs vary too much across sectors for cross-industry comparisons to mean much.
- Book values. Assets are recorded mostly at historical cost, so an older company with depreciated plants can show a flattering ROA.
- Intangibles. Brands and software built internally are largely absent from the balance sheet, inflating ROA for asset-light firms.