ROA

How to read it

ROA, return on assets, is Net Income Alloted to Shareholders divided by Average Assets. The annual figure uses the year’s average assets; the TTM figure uses average assets as of the latest quarter. The ratio rises when profit grows faster than the asset base, and falls when profit shrinks or the company takes on assets — through acquisitions, heavy investment or piling up cash — that have yet to earn much. Averaging assets smooths out a single period-end balance that happens to be unusually high or low.

What is typical

Banks and insurers hold very large balance sheets relative to their earnings, so their returns on assets look low next to other industries. Software and service companies need few physical assets and can show high returns, while utilities, manufacturers and real estate companies sit in between. Compare the value with the median for the company’s sector rather than across industries.

Pitfalls

Net income includes one-off gains and charges, so a single unusual item can lift or depress the ratio for a year. Assets are recorded at book value, and older assets written down over time can make returns look better than a newer competitor’s. ROA also feeds the Piotroski F-Score on stockrow, which awards points when it is above zero and when it is up on a year earlier.