A major distorter of Return on Assets Ratio (ROA) is the total assets. ROA calculates asset value on the book value or carrying value, which bases itself on the original cost of the asset less depreciation, amortization, or impairment costs made against the asset. The market value of the same asset may have no relation to the book value. For instance, a company renting out a building constructed spending $100,000 for $20,000, excluding all maintenance and taxes, has a return of asset for $20,000/$100,000 * 100 = 20 percent. The market value of the building may, however, be $500,000, meaning that the actual ROA is $20,000/$500,000 * 100 = 4 percent.
Another distorter occurs because different industries have different capital requirements, and therefore ROA does not make a good method to compare two disparate industries. An oil refinery set up at a total cost of $10,000,000 may yield an annual profit of $100,000, with ROA of just one percent, whereas another oil refinery with the same investment may yield an annual return of only $75,000, with ROA of 0.75 percent, revealing operational or logistics inefficiencies of the second oil refinery. In contrast, a consultancy firm with an investment of $50,000 might provide an annual return of $5,000, or ROA of 10 percent.
Return on Assets ratio, while providing a good indication of the viability of the business and the competence of the management, does not however provide any conclusive results about a company. This financial ratio is best used with other ratios and financial statements to obtain a complete picture about the company.