Return on Assets Is the Hit-By-Pitch of Investing

Januari 15, 2026

Return on Assets Is the Hit-By-Pitch of Investing

Why ROA Often Tells a Misleading Story About Business Quality

In baseball, a hit-by-pitch gets a player on base—but no one mistakes it for skillful hitting. In investing, Return on Assets (ROA) often plays a similar role. It appears in financial statements, looks objective, and is widely cited, yet frequently says more about accounting structure than true business performance.

This article explains why ROA can be a dangerous shortcut, when it matters, and how serious investors should think beyond it.

1. What Return on Assets Actually Measures

Return on Assets is a simple ratio:

ROA = Net Income ÷ Total Assets

In theory, it measures how efficiently a company uses its assets to generate profit. A higher ROA suggests better asset utilization; a lower ROA suggests inefficiency.

On paper, this sounds useful. In practice, it is often misleading.

2. Why ROA Looks Attractive—but Isn’t Always Informative

ROA appeals to investors because it:

Is easy to calculate
Appears comparable across companies
Suggests operational efficiency

But like a hit-by-pitch, ROA can produce a “result” without reflecting real skill or quality.

The problem is that assets are not created equal, and accounting definitions distort reality.

3. Accounting Distortions: The Core Problem with ROA

Asset Intensity Varies by Industry

Capital-light businesses (software, consulting, media) naturally show higher ROA than capital-intensive ones (manufacturing, utilities, telecom).

This does not mean:

Software companies are always better businesses
Asset-heavy companies are poorly managed

It means ROA rewards structure, not necessarily performance.

Depreciation and Asset Age Skew ROA

Older assets = lower book value
Lower book value = higher ROA

A company with aging factories may show a higher ROA than a company investing aggressively in modern equipment—even if the latter is better positioned long-term.

ROA can penalize reinvestment.

Intangible Assets Are Often Missing

Brand, intellectual property, network effects, and human capital:

Drive enormous value
Rarely appear fully on the balance sheet

Companies that grow through internal innovation often look “asset-light,” inflating ROA artificially.

4. ROA Rewards Financial Accidents, Not Strategy

Just as a hit-by-pitch is accidental, ROA improvements often come from:

Asset write-downs
Spin-offs
Share buybacks
Accounting changes

These events can boost ROA without improving:

Competitive advantage
Customer value
Long-term cash generation

ROA reacts to numerator and denominator noise, not necessarily business fundamentals.

5. When ROA Is Actually Useful

ROA is not useless—it is just context-dependent.

It can be helpful when:

Comparing companies within the same industry
Evaluating banks and financial institutions (with caution)
Identifying extreme inefficiencies
Spotting asset bloating or capital misallocation

Used carefully, ROA can highlight red flags—but rarely green lights.

6. Better Questions Than “Is ROA High?”

Instead of asking:

“Is this company’s ROA impressive?”

Investors should ask:

How durable is this company’s cash flow?
How much capital is required to sustain growth?
Does reinvestment earn attractive incremental returns?
What is the real economic asset base—not just the accounting one?

These questions lead to better decisions than ratio worship.

7. ROIC: A More Honest Metric

Return on Invested Capital (ROIC) often provides a clearer picture than ROA.

ROIC focuses on:

Capital actually required for operations
Returns on incremental investment
Economic performance rather than accounting artifacts

While not perfect, ROIC better aligns with value creation.

8. The Investor’s Trap: Mistaking Clean Numbers for Quality

Many investors gravitate toward ROA because:

It looks scientific
It fits neatly into screens and models
It avoids judgment calls

But investing is not about clean numbers—it is about understanding messy reality.

High ROA businesses can still:

Face competitive erosion
Require hidden reinvestment
Suffer from customer churn or regulatory risk

ROA does not capture these dynamics.

9. ROA and Capital Allocation Decisions

From a CEO or capital allocator’s perspective, ROA can be actively misleading.

It may encourage:

Underinvestment
Asset-light optics over durable capability
Short-term financial engineering

Great businesses often accept lower reported ROA in exchange for:

Long-term strategic positioning
Competitive moats
Sustainable growth

The best decisions do not always optimize ROA.

10. Final Thoughts: Don’t Confuse Getting on Base with Skill

Return on Assets is not meaningless—but it is frequently misunderstood and overused.

Like a hit-by-pitch:

It gets attention
It produces movement
It does not demonstrate mastery

Serious investors look past ROA and focus on:

Cash generation
Reinvestment economics
Competitive durability
Management quality

ROA may show up in the box score—but it rarely tells you who the best hitters really are.

mary:

Despite all appearances to the contrary, this is a post about investing � not baseball. So, to those of you who love reading about investing but hate reading about baseball: don�t be deterred. It�s worth reading all the way through.

Return on assets is the hit by pitch of investing. Common sense suggests it isn�t a very important measure. Why would any investor care about return on assets when return on equity and return on capital tell you so much more?

You don�t have ...

Keywords:

return on assets, hit by pitch, ROA, HBP, value investing, value investor, investing, stock, stocks

Article Body:

You don�t have to know a lot about baseball to know that the number of times a batter is hit by a pitch shouldn�t tell you much about his value to the team. After all, getting hit by a pitch is a fairly rare occurrence. Even if some players are truly talented when it comes to getting plunked, they still won�t get hit enough to make a huge difference, right?

That�s true. In and of itself, the act of getting hit by a pitch is not particularly productive. But (and here�s where things get interesting), as a general rule, a simple screen for the batters who get hit most often will yield a list of good, underrated players.

Why? The most likely explanation is that a HBP screen returns a list of players who are similar in other, more important ways. Perhaps batters who get hit more often also tend to walk, double, homer, and fly out more often � while grounding into double plays less often. Even a casual baseball fan might suspect this.

Since this blog is about investing rather than baseball, there�s no reason for me to discuss whether such a correlation really does exist. I�ll just provide a list of the top ten active leaders for HBP: Craig Biggio, Jason Kendall, Fernando Vina, Carlos Delgado, Larry Walker, Jeff Bagwell, Gary Sheffield, Damion Easley, Jason Giambi, and Jeff Kent.

After the top ten, the list is no less impressive. #11 � 15 are: Derek Jeter, Luis Gonzalez, Alex Rodriguez, Matt Lawton, and Barry Bonds. Since this list is based on career totals for active players, it's biased towards players who remain in the majors and who get a lot of plate appearances. That fact alone means the guys on this list are likely going to be above average players. However, even if you look at the single season HBP list, which includes a few young players (e.g., Jonny Gomes), the guys with high HBP totals still tend to be extraordinarily productive offensively.

Simply put, screening for HBP tends to return a much higher number of �bargain� batters than you�d expect. One explanation for this is that the good things players with high HBP totals do tend to be less conspicuous than the good things other players tend to do.

Might there be a parallel in the world of investing? You bet. So, again I say -

Return on assets is the hit by pitch of investing.

Return on assets is a good screen for high � quality, low � profile businesses. A high return on equity does not go unnoticed for long. Sometimes, a high return on assets does. Jakks Pacific (JAKK) is one good example of a high ROA stock. Its returns have basically been what you�d expect from a toy company. That may not sound like great news to owners of Jakks; but, it is.

Jakks sells at a price � to � earnings ratio of about 12 and a price � to � sales ratio of about 1. The company has grown quickly. Over the past five years, revenue has grown at an annual rate of about 25%. Shareholders haven�t enjoyed the full benefits of that growth, because of share dilution � but, that�s something best left to a longer discussion of Jakks. The point here is simple.

Jakks may not be anything special as a toy company, but it is a toy company. Jakks� past return on assets proves that simply being a toy company is something special. Jakks� "normal" ROA of around 5 � 12% may be nothing extraordinary in the toy business; but, it is far more than what most businesses earn. If there will be any future growth at Jakks, the current P/E of 12 will be shown to have been utterly ridiculous.

If you screen for high returns on equity, you might have missed Jakks. But, if you screen for high returns on assets, you�d have caught this apparent bargain. By the way, I believe Joel Greenblatt�s magic formula would have lead you to Jakks as well.

Village Supermarket (VLGEA) is another stock that has often earned a good return on assets, but has failed to ever earn a high enough return on equity to get much attention. This business is not as cheap as it once was; but, it isn�t exactly expensive at these prices either. For at least five years now, Village has looked quite clearly like it should be valued as a mediocre business. That�s saying something, because the market has continually valued VLGEA as a sub � par business; which it isn�t.

In 2000, you could have bought VLGEA at a 50% discount to book value. In 2001, the average buyer still obtained shares at a greater than 25% discount to book value. By then, anyone who had been monitoring Village�s return on assets for the previous five years would have known the stock was cheap.

For the last ten years, Village�s return on equity has been nothing more than average; however, the performance of the stock has been anything but average. An investor with one eye on Village�s price � to � book ratio and the other eye on Village�s return on assets would have enjoyed the decade long climb without breaking a sweat.

Another one of my favorite high ROA stocks is CEC Entertainment (CEC) � better known as Chuck E. Cheese. Recently, the stock has earned a good return on equity. However, a simple screen based on ROE would have brought a lot of less than wonderful businesses to your attention along with Chuck E. Cheese.

Return on assets told a different story. Chuck E. Cheese has consistently earned an extraordinary return on assets for the last decade.

Now, it�s true that Chuck E. Cheese has earned a very nice return on equity as well. But, if you're an investor who knows what normal ROA numbers look like, one look at CEC's return on assets will blow you away.

Debt can play the role of the fairy godmother. So, an investor needs to look beyond the veil of current performance. Return on assets can often provide a glimpse of what the stroke of midnight will bring. ROA is just one piece of the puzzle. But, it�s an important piece nonetheless.

A high return on assets doesn�t guarantee quality. However, I�ve found that Mr. Market has usually offered many more small, growing companies with extraordinary returns on assets than he has offered small, growing companies with extraordinary returns on equity.

Therefore, just as a general manager might want to run a quick screen for a high HBP number, you may want to run a quick screen for a high ROA number. I know it�s not supposed to be the best indicator of a bargain. But, in my experience, it tends to turn up a lot of neat ideas.

Obviously, a high return on equity is important. I�m not saying it isn�t. I�m just saying a high return on assets is more important than you think.