ROA

What it means

ROA, return on assets, is a ratio showing how much profit a company generates from each euro of assets, meaning all the property it uses. It is calculated as profit divided by total assets, usually the average for the period, and expressed as a percentage.

The numerator is either net profit or EBIT, profit before interest and taxes. The EBIT version is better for comparing companies financed differently, because it ignores interest, which depends on how much debt a company has.

ROA is one of the basic profitability ratios in financial analysis. Together with ROE it shows whether a company earns its returns through efficient use of assets or through borrowing.

How it works in practice

In the annual analysis we calculate ROA from the financial statements and compare it with previous years and the sector average. Capital-intensive sectors such as manufacturing or logistics naturally have lower ROA than services, so comparison only makes sense among similar companies.

When ROA falls, we look for the cause in two directions: whether the margin is shrinking or assets are growing faster than sales. It often turns out that the company holds a lot of stock, uncollected receivables or idle assets that could be sold.

Banks look at ROA when assessing loans and investors when valuing a company. We prepare an overview for clients in which ROA is accompanied by an explanation of one-off items, so readers do not draw wrong conclusions from a single fluctuation.

What to watch out for

ROA depends on how assets are valued. A company with old, almost fully depreciated assets shows a high ROA even though large investments are coming. When comparing, we therefore also look at the age of assets and planned replacements.

Assets held under an operating lease are not shown on a Slovak balance sheet, which raises ROA compared with a company that owns the same assets. This difference must be allowed for when comparing companies with different approaches to assets.