Return on Assets (ROA) is a critical financial metric that measures how efficiently a company uses its assets to generate net income. It is calculated using the formula:
ROA = Net Income / Total assets (or Average Total assets)
This ratio is a key indicator of a company's operational efficiency and profitability, providing insights into how well management is utilizing the company's assets to produce earnings. ROA is especially important for comparing the performance of companies within the same industry, as it reflects the unique operational and financial structures that can vary significantly from one sector to another.
The average ROA varies significantly by industry. Here is a table showing the average ROA by industries in the US as of Apr 2024:
| Industry | Average ROA | Number of companies |
|---|---|---|
| Advertising Agencies | -4.2 | 22 |
| Aerospace & Defense | 2.6 | 49 |
| Agricultural Inputs | 2.7 | 11 |
| Airlines | -0.6 | 13 |
| Apparel Manufacturing | 3.8 | 17 |
| Apparel Retail | 5.3 | 28 |
| Asset Management | 2.5 | 72 |
| Auto Manufacturers | 3.3 | 15 |
| Auto Parts | 2.4 | 46 |
| Auto & Truck Dealerships | 3.3 | 14 |
| Banks - Diversified | 1.3 | 6 |
| Banks - Regional | 0.9 | 276 |
| Beverages - Non-Alcoholic | 10.8 | 9 |
| Beverages - Wineries & Distilleries | 3.3 | 9 |
| Biotechnology | -45 | 504 |
| Broadcasting | -1.6 | 16 |
| Building Materials | 10.4 | 7 |
| Building Products & Equipment | 9.2 | 29 |
| Business Equipment & Supplies | 2.3 | 7 |
| Capital Markets | 1.2 | 33 |
| Chemicals | 2.9 | 17 |
| Communication Equipment | -4.2 | 51 |
| Computer Hardware | -0.9 | 29 |
| Conglomerates | -0.5 | 12 |
| Consulting Services | 6 | 16 |
| Consumer Electronics | -5.4 | 12 |
| Credit Services | 2.1 | 44 |
| Department Stores | 5 | 5 |
| Diagnostics & Research | -21.8 | 67 |
| Discount Stores | 3.7 | 9 |
| Drug Manufacturers - General | 6.5 | 12 |
| Drug Manufacturers - Specialty & Generic | -22.2 | 48 |
| Education & Training Services | 5 | 16 |
| Electrical Equipment & Parts | 2 | 42 |
| Electronic Components | 0.3 | 30 |
| Electronic Gaming & Multimedia | 1.8 | 7 |
| Electronics & Computer Distribution | 4.1 | 6 |
| Engineering & Construction | 3.9 | 30 |
| Entertainment | -2.8 | 37 |
| Farm & Heavy Construction Machinery | 6.2 | 22 |
| Farm Products | 2.5 | 18 |
| Financial Data & Stock Exchanges | 3.2 | 10 |
| Food Distribution | 2.6 | 9 |
| Footwear & Accessories | 8.6 | 11 |
| Furnishings, Fixtures & Appliances | 3.8 | 19 |
| Gambling | 3.7 | 10 |
| Gold | -0.2 | 27 |
| Grocery Stores | 4.9 | 10 |
| Healthcare Plans | -4.3 | 12 |
| Health Information Services | -13.9 | 32 |
| Home Improvement Retail | 2.7 | 7 |
| Household & Personal Products | 4.8 | 24 |
| Industrial Distribution | 6 | 17 |
| Information Technology Services | 1.6 | 53 |
| Insurance Brokers | 1.7 | 12 |
| Insurance - Diversified | 2.4 | 11 |
| Insurance - Life | 1 | 16 |
| Insurance - Property & Casualty | 1.6 | 36 |
| Insurance - Reinsurance | 2.2 | 7 |
| Insurance - Specialty | 1.6 | 16 |
| Integrated Freight & Logistics | 4.9 | 15 |
| Internet Content & Information | -3.6 | 36 |
| Internet Retail | 2 | 22 |
| Leisure | 1.4 | 23 |
| Lodging | 1.6 | 9 |
| Luxury Goods | 3.5 | 5 |
| Marine Shipping | 6 | 23 |
| Medical Care Facilities | -3.9 | 39 |
| Medical Devices | -27.8 | 102 |
| Medical Distribution | 2.4 | 7 |
| Medical Instruments & Supplies | -16.3 | 45 |
| Metal Fabrication | 5.5 | 13 |
| Mortgage Finance | 0.9 | 17 |
| Oil & Gas Drilling | 4.2 | 6 |
| Oil & Gas E&P | 7.9 | 64 |
| Oil & Gas Equipment & Services | 5.2 | 43 |
| Oil & Gas Integrated | 6.1 | 6 |
| Oil & Gas Midstream | 7.3 | 37 |
| Oil & Gas Refining & Marketing | 5.5 | 18 |
| Other Industrial Metals & Mining | -5.9 | 15 |
| Other Precious Metals & Mining | -2.5 | 12 |
| Packaged Foods | 4.4 | 42 |
| Packaging & Containers | 3.9 | 22 |
| Paper & Paper Products | -1.7 | 5 |
| Personal Services | 4.3 | 10 |
| Pharmaceutical Retailers | -33.8 | 8 |
| Pollution & Treatment Controls | 2.6 | 7 |
| Publishing | 1.3 | 7 |
| Railroads | 2.6 | 8 |
| Real Estate - Development | 0.2 | 9 |
| Real Estate Services | 0.7 | 24 |
| Recreational Vehicles | 6.3 | 15 |
| REIT - Diversified | 2.1 | 17 |
| REIT - Healthcare Facilities | 1 | 15 |
| REIT - Hotel & Motel | 1.3 | 15 |
| REIT - Industrial | 2.7 | 16 |
| REIT - Mortgage | 0.1 | 35 |
| REIT - Office | -0.9 | 24 |
| REIT - Residential | 1.5 | 19 |
| REIT - Retail | 2.8 | 21 |
| REIT - Specialty | 2.3 | 15 |
| Rental & Leasing Services | 4.1 | 19 |
| Residential Construction | 11.7 | 20 |
| Resorts & Casinos | 3.1 | 18 |
| Restaurants | 4.4 | 41 |
| Scientific & Technical Instruments | -0.9 | 24 |
| Security & Protection Services | 3.8 | 14 |
| Semiconductor Equipment & Materials | 5.6 | 26 |
| Semiconductors | 0.9 | 64 |
| Software - Application | -5.2 | 192 |
| Software - Infrastructure | -2.1 | 89 |
| Solar | -8.1 | 13 |
| Specialty Business Services | 2.9 | 26 |
| Specialty Chemicals | 2.3 | 46 |
| Specialty Industrial Machinery | 5.6 | 73 |
| Specialty Retail | 3.7 | 40 |
| Staffing & Employment Services | 5.4 | 23 |
| Steel | 5.6 | 15 |
| Telecom Services | -1.7 | 33 |
| Textile Manufacturing | -3.7 | 4 |
| Thermal Coal | 10.6 | 9 |
| Tobacco | 13 | 6 |
| Tools & Accessories | 5.7 | 11 |
| Travel Services | 2.7 | 13 |
| Trucking | 5.8 | 11 |
| Utilities - Diversified | 3.1 | 15 |
| Utilities - Regulated Electric | 2.5 | 25 |
| Utilities - Regulated Gas | 3.2 | 14 |
| Utilities - Regulated Water | 3.4 | 12 |
| Utilities - Renewable | 1 | 11 |
| Waste Management | -0.4 | 12 |
The table shows that the Tobacco industry has the highest average ROA of 13, followed by Residential Construction at 11.7. In contrast, the Biotechnology industry has the lowest average ROA of -45, followed by the Pharmaceutical Retailers industry at -33.8. This variation is due to several factors, including industry-specific earnings and growth prospects, and management's outlook on future performance
The following chart and table show industries with the highest ROA. You can filter the industries by sector in the chart below to see a breakdown of the top industries with the highest ROA for every sector.
| Industry | Average ROA | Number of companies |
|---|---|---|
| Tobacco | 13 | 6 |
| Residential Construction | 11.7 | 20 |
| Beverages - Non-Alcoholic | 10.8 | 9 |
| Thermal Coal | 10.6 | 9 |
| Building Materials | 10.4 | 7 |
| Building Products & Equipment | 9.2 | 29 |
| Footwear & Accessories | 8.6 | 11 |
| Oil & Gas E&P | 7.9 | 64 |
| Oil & Gas Midstream | 7.3 | 37 |
| Drug Manufacturers - General | 6.5 | 12 |
The following chart and table presents industries with the lowest ROA. Within the chart below, you can also refine the industries by sector, allowing you to observe a breakdown of the top industries with the lowest ROA in each sector.
| Industry | Average ROA | Number of companies |
|---|---|---|
| Biotechnology | -45 | 504 |
| Pharmaceutical Retailers | -33.8 | 8 |
| Medical Devices | -27.8 | 102 |
| Drug Manufacturers - Specialty & Generic | -22.2 | 48 |
| Diagnostics & Research | -21.8 | 67 |
| Medical Instruments & Supplies | -16.3 | 45 |
| Health Information Services | -13.9 | 32 |
| Solar | -8.1 | 13 |
| Other Industrial Metals & Mining | -5.9 | 15 |
| Consumer Electronics | -5.4 | 12 |
ROA involves two primary components: Net Income and Total Assets. Net Income, derived from the income statement, represents a company's profit after all expenses, taxes, and costs have been subtracted from total revenues. Total Assets, found on the balance sheet, encompass everything a company owns that has value, including cash, inventory, property, and equipment.
The relationship between these components highlights the efficiency with which a company can convert its investments into profits. Different asset management strategies, such as optimizing inventory levels or investing in high-return projects, can significantly influence a company's ROA.
ROA varies widely across industries due to differences in capital intensity, business models, and operational efficiencies:
The variation in ROA across industries underscores the importance of considering sector-specific dynamics when evaluating financial performance. Factors such as operational efficiency, capital structure, and even the regulatory environment play crucial roles in shaping industry ROA benchmarks.
Several factors influence a company's ROA, underscoring the complexity of asset management and operational efficiency:
High ROA in Software Industry: A leading software company demonstrates a high ROA, attributed to its low asset base and high-profit margins. The company's business model, focused on digital products and cloud services, requires minimal physical assets, allowing it to generate substantial income on a relatively small asset base.
Low ROA in the Transportation Industry: A national transportation company shows a lower ROA, a reflection of its heavy investment in vehicles, equipment, and infrastructure. Despite substantial revenues, the high cost and depreciation of physical assets dilute the net income generated per dollar of assets.
Return on Assets (ROA) is a vital financial metric that provides valuable insights into how efficiently a company uses its assets to generate profit. While ROA varies significantly across industries due to differences in capital intensity, operational models, and market dynamics, it remains a key indicator of a company's operational and financial efficiency.
For companies, improving ROA involves enhancing operational efficiencies, optimizing the asset base, and making strategic investment decisions that align with long-term financial goals. For investors, ROA offers a lens through which to assess a company's profitability relative to its assets, aiding in the identification of potentially lucrative investment opportunities.
Return on Equity (ROE) and Return on Assets (ROA) are both crucial financial metrics used to assess a company's profitability and efficiency, but they measure different aspects of financial performance and are influenced uniquely across different industries. Understanding the distinction between ROE and ROA, particularly in the context of various industries, requires a look at what each ratio signifies and how industry characteristics impact these ratios.
In summary, while both ROE and ROA offer valuable insights into a company's financial health, the impact of industry characteristics on these ratios can be profound. Understanding these nuances is crucial for investors, analysts, and managers in making informed decisions, benchmarking performance, and developing strategies tailored to the specific challenges and opportunities presented by their industry.