Relationship between ROA and profit margin

[ramki]

You have to companies.

Company A has higher ROA and lower Profit Margin than company B.

Company B has a lower ROA and higher Profit Margin than company A.

What does it tell me?

[mismas]

It is simple, company A is more profitable, perhaps their processes are more efficient. They need to sell more to make more.

[indian]

Return on Asset (ROA) is a ratio that measures the margin gained deploying all types of assets (from machinery to cash).

Profit margin is the net amount of all income and all expenditure (including provisions, depreciation, etc.).

Return on Assets depends on various factors or components and also on the types of utilized assets. The more expensive the asset, the more return you need to make it as profitable.

Profit margin can be before and after tax (PAT = profit margin after tax).

So, a company with good ROA and less PAT might be capital intensive, whereas the opposite is service intensive or labor intensive.