What should the ROA be? And what is Return on Assets explained for investors?

What is ROA and Its Important Role in Investment Analysis

If you are studying how to analyze a company before making an investment decision, you need to understand Return on Assets or ROA, which is a financial indicator that reflects the efficiency of a company’s resource utilization.

ROA is the financial ratio comparing (Net Income) to (Total Assets). It indicates how effectively a company uses its assets to generate profit.

The importance of ROA lies in providing a clear overall picture of how the company’s financial resources are managed. A high ROA indicates efficient management, while a low ROA may suggest issues in cost management or revenue generation.

Since assets under accounting principles are the sum of liabilities and shareholders’ equity, investors often consider ROA alongside the DE Ratio (Debt to Equity Ratio) to fully understand the financial structure.

What Should ROA Be? Standard ROA in Different Industries

The common question investors ask is, “What ROA is considered good?” The answer depends on the company’s industry, as resource utilization and business structure vary across sectors.

Generally, a satisfactory ROA ranges from 5% to 10% or higher, but some industries may have different standards.

Banks and Financial Institutions

Good ROA: 1% - 2% or more
Because banks have high costs and efficient resource use

Technology and Software Industry

Good ROA: 10% - 20% or more
Lower development costs and high profit-generating potential

Food and Beverage Industry

Good ROA: 5% - 10% or more
High production and distribution costs require efficient inventory management

Transportation and Logistics Industry

Good ROA: 5% - 15% or more
Requires high-level financial resource investments for operations

Robotics and Advanced Technology Industry

Good ROA: 10% - 20% or more
Invests heavily in R&D but has high profit-generating capabilities from technology

Detailed Method for Calculating ROA

ROA Calculation Formula