Using ROA to evaluate the company's resource management efficiency

What Should ROA Be and Why Is It an Indicator Investors Must Know

When analyzing stocks and assessing a company’s financial health, one key metric not to overlook is ROA (Return on Assets), which shows how effectively the company utilizes its assets to generate profits. A suitable and high ROA indicates efficient management of resources, while a lower value may serve as a warning sign to investigate operational issues.

For investors aiming for sustainable growth, understanding what ROA should be across different industries is essential and requires thorough study.

What Is ROA and How Does It Play a Role in Investment Analysis

ROA (Return on Assets) is a financial ratio that measures the likelihood of net profit generated from all resources controlled by the company, by comparing net income (Net Income) with total assets (Total Assets).

This indicator is important because:

• It shows whether management is utilizing resources efficiently
• It aids in deciding where to allocate investment funds
• It provides a comparative view between competitors within the same industry

In addition to ROA, investors often consider the DE Ratio (Debt to Equity Ratio) alongside to understand how much the company is borrowing relative to its equity.

How to Calculate ROA with Practical Examples

Calculation Formula and Steps

Calculating an appropriate ROA is straightforward. Here are clear steps:

Step 1: Gather annual financial data from the company’s financial statements, especially:

• Net profit (Net Income) – found in the income statement
• Total assets (Total Assets) – found in the balance sheet

These can be obtained from reliable sources such as Bloomberg, Reuters, or the company’s official website.

Step 2: If net profit data isn’t readily available, calculate it as: Net Profit = Total Revenue – Total Expenses

Step 3: Use the figures in the formula:

ROA = (Net Income / Total Assets) × 100%

Basic Example Calculation

Suppose ABC Company has:

• Net profit: 1,000,000 THB
• Total assets: 5,000,000 THB

ROA = (1,000,000 / 5,000,000) × 100% = 20%

This means ABC Company generates a profit of 20 satang from every 1 baht of assets used.

Real Case Study: CPALL in Fiscal Year 2563

CP All Public Company Limited, operating convenience stores, has financial data:

• Net profit: approximately 16,102.42 million THB
• Total assets: approximately 523,354.33 million THB

ROA = (16,102.42 / 523,354.33) × 100% ≈ 3.08%

An ROA of 3.08% for a retail convenience store company is reasonable, given the capital-intensive nature of the business.

Real Case Study: BDMS in Fiscal Year 2565

Bangkok Dusit Medical Services, managing large hospitals, has:

• Net profit: approximately 12,606.20 million THB
• Total assets: approximately 141,542.86 million THB

ROA = (12,606.20 / 141,542.86) × 100% ≈ 8.91%

An ROA of 8.91% indicates higher efficiency in asset utilization compared to CPALL.

What Should ROA Be According to Different Industries

The ideal ROA varies depending on industry characteristics, as each sector has different cost structures and investment needs.

1. Financial Institutions and Banks

Ideal ROA: 1% - 2% or higher Reason: Banks have high operating and financial costs, resulting in generally lower ROA.

2. Information Technology

Ideal ROA: 10% - 20% or more Reason: Low production costs, revenue mainly from software and data, naturally leading to higher ROA.

3. Food and Beverage Industry

Acceptable ROA: 5% - 10% or higher Reason: Requires investment in inventory and distribution systems, leading to moderate ROA.

4. Transportation and Logistics

Suitable ROA: 5% - 15% or more Reason: Heavy resource use, such as vehicles and equipment.

5. Robotics and Advanced Technology

Expected ROA: 10% - 20% or higher Reason: High R&D costs, but significant profits from innovation.

How to Use ROA for Investment Decisions

1. Analyzing ROA Values

When you have the ROA:

• High ROA: Indicates efficient resource use; companies with high ROA often offer better returns.
• Low ROA: May suggest management needs improvement or that the industry typically has lower ROA.

2. Comparing Companies

Compare the ROA of the target company with:

• Industry peers
• Industry average ROA
• ROA over the past 3-5 years

3. Monitoring Trends

Observe how ROA changes over time:

• Upward trend: signs of management improvement
• Downward trend: investigate operational issues

4. Combining with Other Indicators

Use ROA alongside:

• PE Ratio (Price to Earnings)
• Debt to Equity Ratio
• Current Ratio
• EPS (Earnings Per Share)

Limitations of Using ROA

Although ROA is useful, investors should be aware of its limitations:

1. Cross-Industry Comparisons Are Not Valid

ROA varies greatly across industries; comparing a hospital to a tech company is inappropriate.

2. Does Not Reveal Profit Sources

A company might artificially inflate ROA by cutting expenses, which may not be sustainable long-term.

3. No Future Prediction

ROA reflects past and current efficiency, but does not guarantee future performance.

4. Does Not Indicate Debt Structure

Two companies with the same ROA might have different risk profiles due to varying debt levels.

ROE (Return on Equity) vs ROA

Besides ROA, another closely related indicator is ROE (Return on Equity).

ROA (Return on Equity)

Formula: ROA = (Net Income / Total Assets) × 100%

Shows profitability from all company resources.

ROE (Return on Equity)

Formula: ROE = (Net Income / Shareholders’ Equity) × 100%

Indicates profitability from shareholders’ equity only.

Main Differences

1. Basic Data

• ROA uses total assets
• ROE uses shareholders’ equity

2. Performance Reflection

• ROA indicates overall management efficiency
• ROE shows the return to shareholders

3. Risk Level

• ROE tends to be higher than ROA because of smaller denominator
• ROE is riskier if the company has high leverage

4. Application

• Value investors (Value Investors) look for ROA of 8-10% or higher
• They seek ROE of 10% or more

Where to Find ROA Data

Those interested in analyzing ROA can find data from:

1. Company Financial Statements

• Income Statement (งบกำไรขาดทุน)
• Balance Sheet (งบดุล)

2. Securities Websites

• The Stock Exchange of Thailand (SET)
• “Company Data” or “Financial Info” sections

3. Financial Data Providers

• Bloomberg
• Reuters
• Yahoo Finance
• Brokerage websites

How to Check on SET Website:

1. Visit SET.or.th
2. Search for the stock
3. Go to “Company Information”
4. Select “Financial Ratios”
5. Find “ROA” in the list

Frequently Asked Questions (FAQ)

What Is a Good ROA?

Generally, an ROA of 5% to 10% or higher is considered good. However, it depends on the industry:

• Banks: 1-2% is acceptable
• Technology: 10-20% or more
• Retail: 5-8%

Always consider industry context when evaluating ROA.

High ROA ≠ 100% Company Quality

A high ROA often indicates good management, but also consider:

• Stability and trend of ROA (rising or falling)
• Debt structure (check DE Ratio)
• Economic environment

How to Use ROA Effectively

• Compare ROA over 3-5 years
• Benchmark against competitors
• Use with other metrics like ROE, PE Ratio
• Monitor trends regularly

Summary

What Should ROA Be? It depends on the industry, but generally, a value of 5% or higher is meaningful. This indicator helps investors see how well management uses resources.

However, investment decisions should not rely solely on ROA. Combine it with other indicators such as ROE, PE Ratio, Debt to Equity Ratio, and qualitative factors to make well-informed choices.

A systematic company analysis helps investors avoid impulsive decisions and build a resilient, growth-oriented portfolio over the long term.