Return on Net Assets (RONA)
What Is Return on Net Assets (RONA)?
Return on net assets (RONA) is a measure of financial performance calculated as net profit partitioned by the sum of fixed assets and net working capital. Net profit is likewise called net income.
The RONA ratio shows how well a company and its management are conveying assets in financially significant ways; a high ratio result demonstrates that management is extracting additional earnings from every dollar invested in assets. RONA is likewise used to survey how well a company is performing compared to others in its industry.
The Formula for Return on Net Assets Is
The most effective method to Calculate RONA
The three components of RONA are net income, fixed assets, and net working capital. Net income is found in the income statement and is calculated as revenue minus expenses associated with making or selling the company's products, operating expenses, for example, management salaries and utilities, interest expenses associated with debt, and any remaining expenses.
Fixed assets are unmistakable property utilized in production, like real estate and machinery, and do exclude goodwill or other intangible assets carried on the balance sheet. Net working capital is calculated by taking away the company's current liabilities from its current assets. It is important to note that long-term liabilities are not part of working capital and are not deducted in the denominator while computing working capital for the return on net assets ratio.
On occasion, analysts make a couple of adjustments to the ratio formula contributions to smooth or standardize the outcomes, particularly while contrasting with different companies. For instance, consider that the fixed assets balance could be impacted by certain types of accelerated depreciation, where up to 40% of the value of an asset could be disposed of in its most memorable full year of organization.
Moreover, any critical occasions that brought about either a large loss or unusual income ought to be adjusted out of net income, particularly assuming these are one-time occasions. Immaterial assets, for example, goodwill are one more thing that analysts sometimes eliminate from the calculation, since it is frequently essentially derived from an acquisition, as opposed to being an asset purchased for use in creating goods, like another piece of equipment.
What Does RONA Tell You?
The return on net assets (RONA) ratio compares a company's net income with its assets and assists investors with determining how well the company is generating profit from its assets. The higher a company's earnings relative to its assets, the more successfully the company is sending those assets. RONA is a particularly important measurement for capital intensive companies, which have fixed assets as their major asset component.
In the capital-intensive manufacturing sector, RONA can likewise be calculated as:
Deciphering Return on Net Assets
The higher the return on net assets, the better the profit performance of the company. A higher RONA means the company is utilizing its assets and working capital proficiently and successfully, albeit no single calculation recounts the whole story of a company's performance. Return on net assets is just one of numerous ratios used to assess a company's financial health.
On the off chance that the purpose of playing out the calculation is to produce a longer-term point of view of the company's ability to make value, extraordinary expenses might be added once again into the net income figure. For instance, in the event that a company had a net income of $10 million however incurred an extraordinary expense of $1 million, the net income figure could be adjusted vertical to $11 million. This adjustment gives an indication of the return on net assets the company could anticipate in the next year in the event that it needs to causes no further extraordinary expenses.
Illustration of RONA
Assume a company has revenue of $1 billion and total expenses including taxes of $800 million, providing it with a net income of $200 million. The company has current assets of $400 million and current liabilities of $200 million, giving it net working capital of $200 million.
Further, the company's fixed assets amount to $800 million. Adding fixed assets to net working capital yields $1 billion in the denominator while ascertaining RONA. Isolating the net income of $200 million by $1 billion yields a return on net assets of 20% for the company.
Highlights
- Return on net assets (RONA) compares a company's net profits to its net assets to show how well it uses those assets to produce earnings.
- Net income and fixed assets can be adjusted for unusual or non-repeating things to gain a normalized ratio result.
- A high RONA ratio shows that management is boosting the utilization of the company's assets.
