Return on assets (ROA) is one of profitability indicators reveals how much profit will be generated by unit of assets. It expresses how effectively the company manages its assets.
* often average from the beginning and ending balance
The numerator is usually EAT (PAT) or EBIT.
The higher is the net margin and the higher asset turnover, the higher is ROA.
ROA is usually lower in companies with naturally high asset (e.g. utilities). Conversely, companies with low assets (e.g. services) tend to have higher ROA.
Comparison and recommended value
- with companies in the same industry, even if they have different proportion of equity and debt (advantage against ROE). Comparison with companies in different industries does not make much sense because each industry has different net margins, asset turnover and capital intensity.
- appropriate comparison is with the past in the entity
Recommended value: Wikipedia states that ROA above 5% is considered good (12).