Many people choose stocks randomly and then see them fall. That’s because they still don’t understand what ROA really is and how important it is for investment decisions. I encounter this situation very often—people only look at the company name or analyze technical charts in the same way, without digging deeper into whether the management is capable or not.

ROA is a metric that shows how efficiently a company uses its assets to generate profit. If ROA is high, it means the management knows how to use money effectively. If ROA is low, it might indicate they are letting assets sit idle or managing poorly.

Calculating ROA is very simple—just divide net profit by total assets, then multiply by 100 to get a percentage. This formula tells you how many baht of profit a company can generate from every 100 baht of assets. The higher the number, the better.

Imagine two coffee shops. The first invests heavily—buying a building, expensive coffee machines, luxurious furniture, totaling 10 million baht in assets, but only makes a profit of 500,000 baht at year-end (ROA just 5%). The second rents a small space, uses standard equipment, with assets of only 1 million baht, but earns a profit of 200,000 baht (ROA 20%). If you only look at the final profit figures, the first shop seems wealthier. But if you ask which is managed more intelligently, clearly it’s the second.

A good ROA should be above 5%. If it exceeds 10%, it’s considered an excellent company. However, be cautious because different industries have different structures. Tech or software companies that don’t require heavy machinery investments should have ROA soaring to 15-20% or more. Power plants or airlines that need to build factories typically have ROA around 5-7%, which is also good. Never compare the ROA of banks with software companies, as they are not comparable at all.

What to watch for is an increasing ROA trend year over year—that signals the company is growing. Management might have just successfully cut costs or launched new high-margin products. This could be the moment when the stock price surges before the market realizes it. Conversely, if ROA declines consistently or stays below 3%, be cautious because it indicates poor asset management.

Compared to ROE (Return on Equity), which measures profit from shareholders’ funds only, ROA is the real indicator that can’t be fooled because it includes liabilities. Some companies might have ROE as high as 30%, but their ROA is low because they borrowed money to inflate figures. If you only look at ROE, you might fall into a trap.

Apple is a good example of high ROA because they design products in the US but manufacture in Asia, avoiding heavy asset burdens. Their ROA consistently hits 25-30%. Tesla, on the other hand, has to build factories worldwide, with huge assets, so their ROA fluctuates between 5-15%, despite high profits. This illustrates different business models.

If you are a trader, you can use ROA to help make decisions. For example, if you see a company’s ROA declining for three consecutive quarters but the stock price doesn’t drop, you can wait for a technical signal and then open a short position. Combining fundamental analysis with technical analysis is a strategy used by professional traders.

Be aware that ROA isn’t applicable to banks because their balance sheet structure is different. Bank ROA figures are always very low, even if they are profitable. Some companies might also manipulate accounting strategies to make ROA look better than it really is. Therefore, it’s important to look at multiple perspectives, not just ROA alone.

In summary, ROA is a tool that shows how effective management is. Once you understand it, stock selection becomes easier and more confident. No more guessing randomly.