Question

What is the normal range for Return on Assets and Return on Equity ratios? I am looking at a huge set of data and some values for these are -200% or 4400%... I am wondering what ranges for ROA and ROE is considered normal. Thank you!

Answer 1

There is no particular number which can define a normal ROA and ROE.

However the following must be used in analysis:

1: Negative ROA/ROE implies that there is a loss and hence it is not preferable.

2: The industry averages must be taken into consideration. So if the normal average in the industry is 5% while the company is making 15%, it will be considered a good Return. Conversely if the normal average is 50% but the company is making 35%, it will be considered a low performing business.

Hence the decision whether the ROA/ROE is sufficient must be taken after considering the industry averages and the firm specifications.