This financial metric helps you assess how efficiently a company is using its assets to generate earnings.
Net profit divided by average total assets. A high RoA means the management is using its assets efficiently.
Say, person X and person Y both own an ice cream vending machine worth Rs 100. So, both have total assets worth Rs 100 (contd.)
X earned Rs 10 net profit using the machine, while Y earned Rs 20. Then their RoAs are 10% (Rs 10/100) and 20% (Rs 20/100), respectively.
- It considers debt, unlike RoE. So, it is a better metric for peer comparison. - Unlike RoCE, it can be used for BFSI (banking, finance and insurance) companies.
- It cannot be used to compare companies from different sectors. - Capital-intensive businesses inherently have high asset bases and, thus, low ROA.