What does a company's ROA tell you？

Investing with moomoo joined discussion · Jul 2, 2021 21:17

You may have seen the term "ROA" in analyst reports or financial statements many times. Do you know what it is and how the ratio can generate useful information?

What is ROA?

The return on assets (ROA) shows the percentage of how profitable a company's assets are in generating revenue.

What does ROA tell you?

Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.

ROA is displayed as a percentage; the higher the ROA is, the better. Higher ROA indicates more asset efficiency.

ROA for public companies can vary substantially and will be highly dependent on the industry. ROA is best used when comparing similar companies or by comparing a company to its own previous performance.

ROA over 5% is generally considered good and over 20% excellent. However, ROA should always be compared amongst firms in the same sector.

For example

Pretend ABC company and XYZ company both start a clothes store. ABC company spends $40m on T-shirts, while XYZ company spends $40m on pants.

Let's assume that those were the only assets each firm deployed. If over some given period ABC company had earned $8m and XYZ company had earned $6m, ABC would have the more efficient business.

Limitations of return on assets

The biggest issue with ROA is that it can't be used across industries. That's because companies in one industry, such as the technology industry, and another industry, such as oil drillers, will have different asset bases.

How to find ROA in moomoo?

Desktop:

Look at the right side of the stock page and click the tab "Analysis".
Click on "ROA".