ROA Formula and Methods for Analyzing Financial Resources - A Guide for Investors

What is ROA? Why Do Investors Need to Know?

When it comes to assessing a company’s quality, many people focus only on total profit. But the problem is, two companies may have the same profit, yet use resources very differently. One might generate the same profit with fewer resources, making it more efficient.

ROA (Return on Assets) is a figure that tells us how well a company can generate profit from its available resources. It measures asset efficiency — calculated as ROA = (Net Profit / Total Assets) × 100%

The acronym ROA stands for Return on Assets, which compares the net profit a company makes to all the assets used to generate that profit. The percentage indicates how much profit is generated per unit of resource.

Smart investors understand that ROA is a crucial tool because it shows how well management is using our (money) or ###shares that are part of the company(.

How to Calculate ROA Formula - Easy Steps

) Step 1: Gather Basic Data

First, you need to collect two figures from the company’s financial statements:

• Net Profit (from the income statement)
• Total Assets ###from the balance sheet(

These data are usually annual figures, and it’s recommended to use sources like SET or other stock exchange websites.

) Step 2: Use the ROA Formula

Plug the two figures into the formula:

ROA = ###Net Profit / Total Assets( × 100%

The result is a percentage indicating resource utilization efficiency.

) Example 1: Retail Business (CPALL)

CP All Public Company Limited in fiscal year 2020:

• Net Profit: 16,102.42 million baht
• Total Assets: 523,354.33 million baht

ROA = ###16,102.42 ÷ 523,354.33( × 100% = 3.08%

This means that monthly, CPALL uses 100 baht of resources to generate 3.08 baht of profit.

) Example 2: Hospital Business (BDMS)

Bangkok Dusit Medical Services in 2022:

• Net Profit: 12,606.20 million baht
• Total Assets: 141,542.86 million baht

ROA = ###12,606.20 ÷ 141,542.86( × 100% = 8.91%

BDMS has an ROA nearly 3 times higher than CPALL, indicating BDMS uses resources more efficiently.

Using the ROA Formula in Actual Analysis

) Step 3: Analyze the Figures

After calculating, you need to understand what the numbers mean.

High ROA (such as 10% or more)

• Indicates good resource management by management
• For every 100 baht of resources, the company generates at least 10 baht of profit
• Often a sign that the company deserves investor consideration

Low ROA (such as 2-3%)

• May indicate management issues or that the company needs a lot of resources to generate profit
• Could be natural for certain industries ###like banking or retail###
• Should check for trends of improvement or decline

Step 4: Compare

Looking at a single ROA figure isn’t very useful. You should compare:

• Against competitors: Company A has ROA 8%, but Company B in the same industry has 12%. That suggests B is more efficient.
• Trend over time: Increasing ROA over years is a good sign.
• Industry average: Different industries have different typical ROA levels.

Step 5: Make Investment Decisions

Investors reading this will have an edge in decision-making:

• Invest in companies with high and improving ROA
• Avoid companies with low and declining ROA
• Use ROA alongside other indicators for balanced decisions

What is a Good ROA?

There’s no universal number, but general principles:

Generally:

• ROA 5-10% is decent and a typical target for value investors
• ROA above 10% is excellent, but may also imply higher risk

By Industry:

• Banks and Financial Institutions: ROA 1-2% is normal
• Technology: ROA 10-20% is common and expected
• Retail: ROA 3-8% is typical
• Private Hospitals: ROA 8-12% is good
• Logistics and Transportation: ROA 5-15%, depending on business model

The key point is to compare with industry peers. An ROA of 5% could be good or bad depending on the industry average.

Limitations of the ROA Formula - Things to Watch Out For

However, ROA isn’t a magic bullet that reveals everything:

1. Industry Differences

Banks and convenience stores operate very differently; direct comparison of ROA isn’t always valid.

( 2. Past Data Doesn’t Guarantee Future Performance

ROA last year doesn’t mean the same this year. Industry changes can affect results.

) 3. Does Not Reflect Debt

A high ROA with lots of debt can be risky. Check the DE Ratio ###Debt to Equity Ratio(.

) 4. Does Not Indicate Profit Quality

A high ROA might be due to cost-cutting beyond sustainable levels, which may not be sustainable long-term.

ROA vs ROE - Key Differences

Investors often confuse ROA with ROE. Here’s how they differ:

ROA (Return on Assets)

• Measures: All of the company’s resources (including debt)
• Formula: ROA = Net Profit ÷ Total Assets
• Indicates: Efficiency in using all resources

ROE (Return on Equity)

• Measures: Only shareholders’ equity
• Formula: ROE = Net Profit ÷ Shareholders’ Equity
• Indicates: Efficiency in generating profit for shareholders

Example: A company earns 100 million baht profit, has assets of 1,000 million, and debt of 600 million, so equity is 400 million.

• ROA = 100 ÷ 1,000 = 10%
• ROE = 100 ÷ 400 = 25%

Why is ROE higher? Because the company used debt to leverage, so shareholders invested less but earned more (but with higher risk).

Summary:

• Value Investors focus more on ROA because it reflects true efficiency
• An ROA increase of 8-10% is excellent
• An ROE increase of over 10% is good

Where to Find ROA Values

If you want to see a company’s ROA:

Through the Stock Exchange of Thailand (SET):

1. Visit SET.or.th
2. Search for the company name
3. Select the “Financial Ratios” tab
4. ROA will be displayed there

Or calculate yourself using the learned formula:

• Download the financial statements (Annual Report)
• Find net profit and total assets
• Plug into the formula

Practical Implications

Once you understand ROA, how to use it in decision-making:

1. For Long-term Investors

Look for companies with high ROA in their industry and improving trends. This indicates good management.

2. For Comparison

When analyzing two companies, compare their ROA. A higher figure isn’t always better, but it’s a good sign.

3. Watch for Warning Signs

• ROA declining year over year
• ROA significantly below industry average
• ROA extremely high (which might mean cost-cutting beyond sustainable levels)

Summary

ROA is a tool that shows how well a company uses its money, calculated as ROA = (Net Profit ÷ Total Assets) × 100%. The resulting figure indicates management efficiency.

A good ROA generally ranges from 5-10% or higher, depending on the industry.

Important: Use ROA together with other metrics like ROE, PE Ratio, or cash flow for more informed decisions. Remember, a good or bad number must be viewed in the context of the industry and the company’s situation.

The more you understand these financial indicators, the stronger and smarter your investment decisions will become.