Return on Average Assets (ROAA)
Candlefocus EditorThe ROAA formula tells you the rate at which a company is generating income relative to its average total assets. A higher ROAA, therefore, indicates that a company is making better use of its assets by turning them into profits. Conversely, a lower ROAA indicates that the company needs to improve its efficiency at asset utilization and profit generation. By having a high ROAA, a company is also demonstrating that it has a competitive advantage when it comes to using capital.
Companies with a lower ROAA usually invested more upfront on acquiring assets such as equipment, technology, and inventory. Such investments sometimes take longer to realize a return (and thus increase ROAA), making ROAA a lagging indicator in these cases. Companies that are able to balance the need for asset investment with income generation will tend to have a higher ROAA score.
Furthermore, the ROAA metric helps investors understand the health and profitability of a company. A higher ROAA shows that management is doing well in making the most effective use of its assets. By taking into account of asset balances and changes over time, ROAA also takes into account the seasonal and cyclical fluctuations in asset values. In this way, ROAA is a more comprehensive and balanced metric than return on assets (ROA).
In conclusion, ROAA is an important indicator of a company's ability to use its assets to generate profits and is a key component of financial health analysis for investors. It should be used in conjunction with other metrics in order to get a fuller picture of a company's overall performance.