Key Takeaways
- ROA shows how efficiently a company uses assets to generate profits.
- A higher ROA indicates better asset utilization and profitability.
- Compare ROA only among similar companies within the same industry.
- Changes in ROA can signal profit improvements or investment challenges.
- Industry-specific comparisons are crucial, as average ROAs vary by industry.
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Return on assets (ROA) measures a company’s profitability relative to its total assets. It is calculated by dividing a company’s net income by its total assets, showing how efficiently it uses its resources to generate profit.
A higher ROA indicates better asset utilization and stronger financial performance, while a lower ROA may signal inefficiencies or lower profitability. Analysts often use average total assets over a period to get a more accurate picture, and ROA can vary widely across industries. Capital-intensive companies like ExxonMobil have lower ROA than tech firms with fewer assets.
Learn how to calculate return on assets to assess profitability using assets efficiently, plus see examples for better understanding and decision making.
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How to Calculate Return on Assets (ROA)
ROA typically uses a company’s average total assets, found by adding total assets from the end of one year to those of the previous year, then dividing by two.
Detailed Example: How to Calculate ROA for ExxonMobil
Below is the balance sheet from ExxonMobil‘s 2023 annual report showing its total assets for both 2023 and 2022. Since its 2023 total assets were $376.317 billion and its 2022 total assets were $369.067 billion, its average total assets would be $372.692 billion.
And here is the income statement for 2023 for ExxonMobil from the annual report, showing its net income for the year of $36.010 billion:
Combining these figures, ExxonMobil’s ROA is 9.7% ($36.010 billion divided by $372.692 billion). This number alone doesn’t tell the full story. Because different industries can have very different ROAs, a more meaningful analysis would be to compare ExxonMobil’s ROA to that of other major oil companies, such as Chevron and BP.
Note
A “normal” ROA will vary to a large extent based on the industry in which a company operates. So be careful when comparing the ROAs of companies in different industries.
Analyzing ROA: Insights for Investors
Calculating the ROA of a company can be helpful in tracking its profitability over multiple quarters and years, as well as in comparing it against similar companies. However, no single financial ratio should determine a company’s performance or investment value. Investors also use other measures, like return on equity (ROE) and return on invested capital (ROIC).
Understanding and Interpreting ROA Metrics
When analyzing a company’s ROA, it’s worth bearing in mind that:
- Companies with a low ROA often need more assets to generate profits. For example, a railroad or manufacturing company is likely to require a large capital investment in fixed assets.
- Companies with a high ROA usually need fewer assets to generate their profits—for example, a consulting firm or other service business.
As a result, companies with a low ROA tend to have more debt since they need to finance the cost of their assets. Having more debt is not bad as long as management uses it effectively to generate earnings.
A rising ROA tends to indicate that a company is increasing its profits with each dollar that’s invested in the company’s total assets. A declining ROA may indicate that a company made some poor capital investment decisions and is not generating enough profit to justify the cost of those assets. A declining ROA could also indicate that the company’s profits are shrinking due to declining sales or revenue.
For that reason, it can often be useful to compare a company’s ROA over multiple accounting periods. One year of a lower ROA may not be a concern if the company’s management team is investing in its future and the company anticipates increased profits over the coming years.
Comparing ROA Across Industries
As mentioned, before making any judgments about whether a particular ROA is good or bad, it’s important to compare companies of similar size and in the same industry.
For example, an auto manufacturer with huge facilities and specialized equipment might have a ROA of 4%. On the other hand, a software company that generates the same profit but with far fewer assets might have a ROA of 18%.
At first glance, the automaker’s ROA might appear low as opposed to the software company’s. However, if the automobile industry’s average ROA is 2%, then the auto company’s 4% ROA is outperforming its competitors, signifying that it is making effective use of its resources. And the software company’s 18% ROA will seem far less impressive if its peers in that industry are averaging, say, 20%.
What Is ROA in Finance?
Return on assets (ROA) is a financial ratio that shows how much profit a company generates from its total assets.
What Are Total Assets?
The total assets on a company’s balance sheet consist of both current assets and long-term assets. Current assets, which are more liquid, can include cash and cash equivalents, accounts receivable, and inventory. Long-term assets will include fixed, tangible assets such as buildings and equipment, and, in some cases, intangible assets such as intellectual property.
How Do You Calculate Return on Assets?
Although there are multiple formulas, return on assets (ROA) is usually calculated by dividing a company’s net income by its average total assets. Average total assets can be calculated by adding the prior period’s ending total assets to the current period’s ending total assets and dividing the result by two.
What Is a Good Return-on-Assets Ratio?
In general, a ROA of 5% or less might be considered low, and a ROA over 20% is high. However, it’s best to compare the ROAs of similar companies in the same industry. For an asset-intensive company, a ROA of 5% or even 1% might be acceptable.
What Does ROA Tell You?
A rising ROA indicates that a company is generating more profit from its assets. A declining ROA indicates the opposite. But there can also be other factors involved, so it’s helpful to look back over multiple years. A dip in ROA for a single year may be nothing to worry about, but a consistent downward trend calls for a good explanation.
The Bottom Line
ROA measures how a company generates profit from its total assets. Comparing ROA across similar companies within the same industry provides more meaningful insights. A rising ROA may indicate improved profitability, while a declining ROA could signal inefficient asset use or shrinking profits.
Don’t rely solely on ROA; consider factors such as industry standards and multiyear trends to gain a more comprehensive understanding of a company’s financial health. Consider ROA with other financial metrics, such as ROE and ROIC, for a thorough evaluation.
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