Return on Total Assets (ROA)

Return on Total Assets (ROA)

Formula

$$\text{ROA} = \frac{\text{Operating profit before tax} + \text{Interest expense}}{\text{Average total assets}}$$

ROA=Average total assetsOperating profit before tax+Interest expense​

Explanation (simple)

• Measures how efficiently assets are used to generate profit.
• “For every RM1 of assets, how many sen of profit (before tax) do we earn?”

Satisfactory level / rule of thumb

• Higher is better
• No fixed “good” number; you compare with last year and similar companies.
• A falling trend is a warning sign.

Industry norm (general)

• Asset-light businesses (e.g. services) usually have higher ROA.
• Asset-heavy industries (e.g. manufacturing, airlines, utilities) usually have lower ROA.

Example

• Operating profit before tax = RM800,000
• Interest expense = RM200,000
• Total assets last year = RM6,000,000; this year = RM7,000,000
• Average total assets = (6,000,000 + 7,000,000) ÷ 2 = RM6,500,000

$$\text{ROA} = \frac{800,000 + 200,000}{6,500,000} = \frac{1,000,000}{6,500,000} \approx 15.4\%$$

Interpretation: The company earns about 15.4 sen for every RM1 of assets.