Below 5% - asset-heavy or low-margin
Normal for banks, utilities, airlines, and heavy industry. Judge against peers, not the broad market.
Definition
What is ROA (return on assets)?
Return on assets (ROA) is net income divided by total assets, expressed as a percent. It measures how efficiently a company turns everything it owns - factories, inventory, cash, receivables - into profit. Unlike return on equity, ROA ignores how the assets were financed, so it can't be flattered by piling on debt.
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Short answer
ROA answers "how much profit per dollar of assets?" It's the cleanest read on capital efficiency because debt doesn't flatter it. But it's deeply industry-specific - a 1% ROA is normal for a bank and alarming for a software firm. Compare within a sector.
How to read ROA
5-10% - solid
A healthy, efficient business for most industries - assets are producing real profit.
10-15% - strong
Capital-light, higher-margin operations turning their asset base into profit efficiently.
Above 15% - excellent
Typically asset-light compounders (software, brands, franchises). Rare and usually well-valued.
Why ROA only means something within an industry
A retailer earning $500M on $5B of assets has a 10 percent ROA. A bank earning the same $500M sits on $50B of assets - a 1 percent ROA - and that is completely normal for banking, which runs enormous balance sheets at thin spreads.
ROA also explains ROE: roughly, ROA multiplied by a leverage factor equals ROE. A bank's tiny ROA becomes a respectable ROE only because it is heavily leveraged. That link is why pairing ROA with ROE (and ROIC) tells you whether returns come from operating quality or from borrowing.
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Related
- What is ROE? - return on equity - ROA times leverage, and why the gap matters.
- What is ROIC? - the financing-neutral quality gauge value investors anchor on.
- What is DuPont analysis? - the breakdown that links margin, asset turnover, and leverage to returns.
- What is asset turnover? - revenue per dollar of assets - one of the two drivers of ROA.
See profitability from every angle
invest-like reports ROA next to ROE and ROIC on every stock, so you can see whether returns come from operating quality or from leverage.
Educational only. invest-like is not a registered investment adviser; nothing here is personalised investment advice. Always do your own research and consider your individual circumstances.