What is ROA?
ROA measures how efficiently a company uses its assets to generate profit. It shows what percentage of profit is generated from total assets.
Think of it like this
Two pizza shops each have $100,000 in equipment (ovens, furniture). Shop A makes $10,000 profit (10% ROA). Shop B makes $5,000 (5% ROA). Shop A uses its assets twice as efficiently!
Formula
ROA = Net Income / Total Assets- Net Income: Total profit after all expenses
- Total Assets: Everything the company owns
Why it matters
- Shows asset efficiency
- Higher ROA = better asset utilization
- Important for capital-intensive businesses
- Compare competitors to find best operators
What's a good value?
< 2%
Poor
Inefficient asset use
2-5%
Below Average
Could improve efficiency
5-10%
Average
Decent asset utilization
10-15%
Good
Efficient operations
> 15%
Excellent
Highly efficient
Real-world example
Google ROA: 15% - asset-light model. Walmart ROA: 6% - inventory heavy. Airlines ROA: 3% - expensive planes. Software companies: 10-20% - few physical assets.
Things to watch out for
- Varies dramatically by industry
- Asset-light businesses have higher ROA
- Doesn't account for off-balance sheet assets
- Can be inflated by asset write-downs
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