What is the return on assets (ROA)? How to calculate it with the right formula? Why is it important? If you're looking for answers to these questions, you've come to the right place. In this article, you will learn everything you need to know about ROA. Furthermore, you will have access to an excel template that lets you calculate the return on assets for more than 65,000 companies with just one click.
What is the return on assets?
Return on assets (ROA) is a measure of how efficiently a company is using its asset base to generate profits. ROA is an effective metric as it compares the profits of a company to the resources it has available, providing direct insight into the overall efficiency of a business. A higher ROA shows that a business is more efficient with its assets while a lower ROA indicates a business may not be efficiently using its assets to generate profits.
Return on assets, like many metrics, is difficult to use as a comparative tool across industries. This is because companies will have industry-specific assets that make using ROA impractical. For instance, a trucking company will have a different asset base than a mining company. Keeping this in mind, it’s a good idea to use ROA comparatively only against a company’s historical ROA or against a company with a similar asset base.
Since net income is affected by the amount of debt a company has, you may also see investors using an unlevered ROA metric to benchmark a company's ability to generate earnings from its asset base before interest and taxes. We’ll explain how to calculate this metric in the next section.
Why is ROA important?
By investing in shares in the lowest decile for ROA, you'd get half the returns you'd get by investing in the whole market. For this reason, it is extremely important that you check in what decile are your stocks. You don't want to underperform the market, do you?
How can you check that? Simple! All you have to do is use the Finbox data explorer. Just follow these simple steps:
1) Sign Up for free at Finbox
2) Go to the Finbox data explorer
3) Select the company and the metric you want to check (In this case we want to check the ROA)
4) Scroll down to Sector Benchmark Analysis
5) Control in what decile are your stocks (If your company is in the lowest decile, you will likely underperform the market. As you can guess, Apple is in the highest decile.)
How to calculate ROA with the right formula
ROA = Net Income / Average Total Assets
The return on assets ratio is calculated by dividing a company’s net income by its average total assets over the same period. Since net income is generated over the course of a year, total assets are averaged between the start and end of the year.
Unlevered ROA = EBIT / Average Total Assets
The unlevered ROA metric is calculated by dividing a company’s earnings before interest and taxes (EBIT) by its average total assets over the same period. Since earnings are generated over the course of a year, total assets are averaged between the start and end of the year.
ROA: Benchmarks by Sector
As of April 30, 2020, the sectors with the highest return on assets are consumer staples, industrials, and materials. Healthcare, financials, and information technology are the sectors with the lowest return on assets.
ROA Example [+Excel Template]
I’ve created an example calculation of return on assets to try out. To explore the ROAs of the 65,000+ companies that Finbox supports, just change the ticker in the spreadsheet. Click here to open the spreadsheet in Google Sheets. Select File > Make a copy to modify the example calculation. If you are not already registered on Finbox, all you have to do is sign up for free here.
Don't underperform the market!
Finbox makes it easy to find companies with high ROA. View the 100 stocks with the highest return on assets here.