Definition

ROA (Return on Assets)

The return metric that ignores how the assets were paid for, which is both its use and its limit.

Brian Feroldi

By Brian Feroldi, co-founder of Long Term Mindset

Investing since 2004. 3,000+ articles for the Motley Fool. Author of Why Does The Stock Market Go Up?

Last updated

Return on assets measures how much profit a company generates from everything it owns. It is net income divided by average total assets. Unlike ROE it ignores how those assets were financed, and unlike ROIC it includes assets that are not productively employed.

FormulaNet Income ÷ Average Total Assets

Where it sits between the other two

The three return metrics differ only in what goes in the denominator, and ROA takes the widest view. ROE counts only shareholders' money, so borrowing inflates it. ROA counts every asset regardless of who funded it, which removes that distortion. ROIC narrows again to capital actually employed in operations, excluding surplus cash.

That middle position is ROA's use and its limitation. It cannot be gamed with leverage, and it punishes a company for holding cash it has not yet deployed, which is not really a failure of the business.

Worked example

A company earns $120M. Total assets were $1,400M at the start of the year and $1,600M at the end, and $400M of the closing balance is surplus cash.

Average assets = ($1,400M + $1,600M) ÷ 2 = $1,500M
ROA = $120M ÷ $1,500M = 8.0%
Excluding surplus cash: $120M ÷ $1,100M = 10.9%

Nearly three points of difference, produced entirely by cash the company has not spent. Use average assets rather than the closing balance, or a year of growth distorts the figure on its own.

What counts as good

Entirely industry-dependent, more so than for the other return metrics, because asset intensity varies so widely. Above 5% is respectable for most, and software companies routinely exceed 15% while banks and utilities operate in low single digits by the nature of their balance sheets.

Comparing ROA across industries produces nonsense. Comparing it between direct competitors, where asset bases are structurally similar, is where it earns its place.

Where ROA is the right tool

Two things it gets wrong

Intangible-heavy businesses. A company whose value is brand, code or network shows very few assets on the balance sheet, so ROA looks spectacular without describing anything. The metric assumes the balance sheet captures what the business runs on, which for modern companies is often false.

Depreciated assets. An older factory carried near zero book value produces a flattering ROA compared with a competitor who has just built a new one, even though the newer plant may be far more productive. Age of asset base distorts the comparison in ways nothing on the income statement reveals.

ROA against the three metrics it sits between

Each formula, when it is the right tool, and what distorts it.

ROE vs ROA vs ROIC vs ROCE infographic by Brian Feroldi comparing four return metrics across definition, formula, where the inputs are found, when to use each, pros, cons and what to be aware of. Return on assets is net income divided by average total assets, useful when comparing companies in the same industry with significant fixed assets, and can mislead for newer companies with non-earning assets because it includes depreciation. Return on equity is net income divided by equity. Return on invested capital is EBIT after tax divided by long-term debt plus equity less non-operating cash. Return on capital employed is EBIT divided by total assets less current liabilities.
ROE vs ROA vs ROIC vs ROCE. Original graphic by Brian Feroldi.
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Return metrics need returns to measure

ROA is meaningless for a company that is not yet profitable, which covers most of the first two lifecycle phases. Phase Check places any US-listed company on the curve and names the metric that matters where it sits.

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Frequently asked questions

Above 5% is respectable for most industries, though the range is enormous. Software companies often exceed 15% while banks run near 1% and are perfectly healthy. Only comparisons against direct competitors carry information.
ROA divides profit by all assets regardless of funding. ROE divides by shareholders' equity alone, so borrowing raises it. The gap between the two is a direct measure of how much leverage a company is using.
Because a bank's balance sheet is enormous relative to its profit by design, since assets are the business. Around 1% is a normal and healthy figure, and comparing that to a software company's 15% describes the industries rather than the management.
Average, meaning the opening and closing balances divided by two. Using the closing figure alone penalises a company that grew during the year, since the profit was earned across a period while the assets are measured at a point.
Not very. Their value sits in code, brand and network effects that barely appear on a balance sheet, so ROA looks spectacular without describing anything real. ROIC is the better measure for asset-light businesses.

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