Return on Assets (ROA)

How profitable is the company you're about to invest it? This is what return on assets (ROA) measures. It is not the only measure of profitability, but it is one of the most widely used. The ROA tells us how much profit the firm generates for each rupee of assets they control. For example, a firm with an ROA of 5% means that they generate profit of Rs 5 for every Rs 100 of assets they own.

ROA is often used to compare firms within the same industry. Firms within the same industry are likely to have similar asset profiles. For example, all airlines own or lease aircraft, and these are assets they use to run their business. A higher ROA implies a more profitable company, all else equal.

ROA is not a useful comparison of firms across different industries. This is because asset profiles across industries varies considerably. Suppose we compare an airline and a technology company. The airline owns multiple aircraft, and thus has a large stock of assets. The technology company has a much smaller stock of assets, consisting only of computers and office space. The ROA between these firms is too different to make a useful comparison.

The ROA is computed entirely from a company's accounts. This is unlike indicators such as the PE ratio, that uses the share price as well as accounting information. This means that the ROA does not tell us anything about whether the firm's stock is cheap or expensive. It tells us only whether the firm is profitable or not.

The Return on Assets Formula

The ROA is the net income from the firms most recent income statement, divided by the total assets at the end of the period. The income statement is measured over a period of time (e.g. one year), whereas assets are measured at a single point in time. An alternative calculation uses the average total assets, where we compute the average value of assets between the start and end of the year.

ROA = 100% * (net income / total assets)

Calculating the Return on Assets, An Example

Suppose Bajaj Auto's most recent net income is Rs Cr 3,828. And their total assets are Rs Cr 20,815. Using our formula gives us an ROA of 18.4%

Bajaj Auto ROA = 100% * (Rs Cr 3,828 / Rs Cr 20,815) = 18.4%

Comparing Return on Assetes with Other Indicators

How does the ROA compare to other indicators, such as return on equity (ROE) or return on invested capital (ROIC)? These three indicators all aim to answer the same question: how profitable is the company? All three indicators use only accounting variables, and no market variables. This means that they do not tell us whether the stock is cheap or expensive. They tell us only how profitable the company is.

ROE uses total equity in the denominator instead of total assets. Equity is the difference between assets and liabilities. It represents the book value of the company. If the firm has high debt levels, then equity is low relative to assets, and ROE is much higher than ROA. For firms with low debt levels, ROE is closer to ROA.

The ROIC is a more complex measure that aims to better capture a company's profitability from its core operations. Instead of using net income in the numerator, it uses net operating profit after taxes. This removes any income that does not come from a company's core operations. The denominator uses total capital instead of total assets. This is done be removing cash and current liabilities, so that only capital used to operate the business is considered.

India's Most Attractive Companies Based on Return on Assets

In this live data section, you can find the stocks with the most attractive ROA.

SCRIP*	RETURN ON ASSETS(%) (5-Yr Avg)	GET MORE INFO
MAJESCO	258.7	More Info
EQUIPPP SOCIAL	123.0	More Info
QUINTEGRA SOLUTIONS	79.0	More Info
HINDUSTAN MOTORS	40.0	More Info
STL GLOBAL	37.5	More Info
PRIME SECURITIES	35.9	More Info
CASTROL INDIA	34.2	More Info
P&G HYGIENE	31.7	More Info
BAJAJ CONSUMER CARE	31.5	More Info
HDFC AMC	29.6	More Info

The Stock Screener runs on Equitymaster's own database, which comprises India's leading 4123 companies.
*Data is consolidated wherever applicable

>>  Here's the full list of India's most attractively valued companies