As such, there are no standardized limits for the profitability ratio. It can take on different values, which primarily depend on the type of organization. So, if for banks the ROA value of 1% is considered normal, then for trading companies this will be a very low value. According to statistics, the ROA profitability of manufacturing organizations is not very high: they regularly update their production equipment. In the USA and Great Britain, the average Return on Assets value for large companies is about 15%, in European countries - 9%, in Japan - 7%.
It is important to understand that a high ROA value does not always demonstrate the true state of affairs in the organization. If Return on Assets is significantly higher than the industry average, this indicates that the company is not interested in investing in upgrading assets. But without upgrading equipment and technology, there can be no talk of further business development.
Generally speaking, high ROA increases company quotations. This indicates competent management and profit generation with a relatively low investment volume. Banks pay attention to ROA when considering a loan application.
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Alexander Kuleshov
Alexander Kuleshov
General Director of Sales Generator LLC
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Pros and Cons of ROA
What are the advantages of the ROA indicator:
this is one of the simplest factors that makes it possible to clearly assess the efficiency of using an organization’s assets;
Return on Assets can be used when a company has negative equity;
ROA is one of the most important indicators for investors and company management;
Monitoring the dynamics of the return on assets ratio can clearly demonstrate to the investor the improvement or deterioration of the business efficiency.
Pros and Cons of ROA
The disadvantages of the ROA indicator include:
the possibility of using it only to evaluate companies in a similar field of activity, since different industries have different intensity of asset use;
the peculiarities of the accounting rules may subject ROA to some manipulations;
In some cases, negative equity may cause a significant distortion of the return on assets ratio.