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Return on assets (ROA)

Return on assets is net profit divided by total assets and shows how efficiently the company uses all the resources it owns. ROA measures the profit-generating capacity of all assets whether funded by debt or equity.
Contents
  1. 1.Key points
  2. 2.Formula / calculation
  3. 3.Interpretation
  4. 4.Pitfalls
  5. 5.Frequently asked questions

Key points

  • It is low in capital-intensive sectors (energy, cement, airlines) and high in asset-light ones (software, services).
  • ROA above the sector average shows assets are well managed.
  • assets carried at historical cost can inflate ROA.

Formula / calculation

ROA = Annualised net profit / Average total assets × 100. The gap between ROE and ROA shows the leverage effect: ROE = ROA × (Total assets / Equity).

Interpretation

ROA above the sector average shows assets are well managed. A declining ROA over time signals unproductive investment or margin erosion. For banks 1–2% is normal while industrials are expected to reach 5–10%.

Pitfalls

assets carried at historical cost can inflate ROA. Off-balance-sheet leased assets distort comparison. One-off profits and quarterly seasonality should be corrected by annualising.

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Frequently asked questions

Return on assets is net profit divided by total assets and shows how efficiently the company uses all the resources it owns.

ROA = Annualised net profit / Average total assets × 100. The gap between ROE and ROA shows the leverage effect: ROE = ROA × (Total assets / Equity).

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