Return on Assets (ROA) = Net Income / Total Assets
In the calculation of annual return on assets, the net income of the last fiscal year is used. The Total assets are from the end of year data. Strictly speaking, average total assets over the fiscal year should be used. In calculating the quarterly data, the result is multiplied by 4 to get the annualized rate. Return on assets is displayed in the 10-year financial page.
Return on assets (ROA) measures the rate of return on the total assets (shareholder equity plus liabilities). It measures a firm's efficiency at generating profits from shareholders' equity plus its liabilities. ROA shows how well a company uses what it has to generate earnings. ROAs can vary drastically across industries. Therefore, return on assets should not be used to compare companies in different industries. For retailers, a ROA of higher than 5% is expected. For example, Wal-Mart (WMT) has a ROA of about 8% as of 2012. For banks, ROA is close to their interest spread. A banks ROA is typically well under 2%.
Similar to ROE, ROA is affected by profit margins and asset turnover. This can be seen from the Du Pont Formula:
Return on Assets (ROA)
= Net Income / Total Assets
= (Net Income / Sales) x (Sales / Total Assets)
= Net Profit Margin x Asset Turnover
Like ROE, ROA is calculated with only 12 months data. Fluctuations in the companys earnings or business cycles can affect the ratio drastically. It is important to look at the ratio from a long term perspective. ROA can be affected by events such as stock buyback or issuance, and by goodwill, a companys tax rate and its interest payment. ROA may not reflect the true earning power of the assets. A more accurate measurement is Return on Capital (ROC).
Many analysts argue the higher return the better. Buffett states that really high ROA may indicate vulnerability in the durability of the competitive advantage.
E.g. Raising $43b to take on KO is impossible, but $1.7b to take on Moodys is. Although Moodys ROA and underlying economics is far superior to Coca Cola, the durability is far weaker because of lower entry cost.
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