What is Return on Assets (ROA)?
Return on assets (ROA) is a profitability ratio measuring how efficiently a business uses its assets to generate net income, calculated as net income divided by average total assets and expressed as a percentage.
How It Works
- Formula: ROA = net income / average total assets × 100.
- Higher ROA indicates more efficient asset utilization.
- Components: net profit margin × asset turnover (DuPont decomposition).
- Used to compare profitability across companies of different sizes.
Saudi Context
Saudi sector benchmarks for ROA: banks 1.5% to 2.5%, telecoms 5% to 8%, retail 7% to 12%, real estate 3% to 6%, petrochemicals 6% to 10%. ROA tends to compress in capital-intensive sectors and expand in service or franchise-heavy businesses, useful context for Saudi investors selecting Tadawul sectors.
Example
A Saudi company earns net income of SAR 5,000,000 on average total assets of SAR 50,000,000. ROA = 5,000,000 / 50,000,000 × 100 = 10%.