What is Return On Net Assets - RONA
Return on net assets (RONA) is a measure of financial performance calculated as net income divided by the sum of fixed assets and net working capital. RONA can be used to assess how well a company is performing compared to others in its industry. It reveals if a company and its management are deploying assets in economically valuable ways or if the company is performing poorly versus its peers. RONA can be calculated as:
Return on Net Assets = Net Income / (Fixed Assets + Net Working Capital)
Return on Net Assets
BREAKING DOWN Return On Net Assets - RONA
The return on net assets (RONA) ratio compares a business' net income with its net assets and helps investors to determine the percentage net income the company is generating from the assets. The ratio shows how effectively and efficiently the company is using its assets to generate earnings. It is an especially important metric for capital intensive companies which have fixed assets as their major components.
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 less expenses associated with making or selling the company's products; operating expenses such as management salaries and utilities; interest expenses associated with debt; and all other expenses. Fixed assets are tangible property used in production, such as real estate and machinery, and do not include goodwill or other intangible assets carried on the balance sheet. Net working capital is calculated by subtracting the company's current liabilities from its current assets. It is important to note that long-term liabilities are not subtracted in the denominator when calculating return on net assets.
In a manufacturing sector which is capital intensive, RONA can be also calculated as:
Return on Net Assets = (Plant Revenue - Costs) / Net Assets
The difference between return on assets (ROA) and RONA is that the latter takes a company’s associated liabilities into account.
Interpreting 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 using its assets and working capital efficiently and effectively. Individually, no single calculation tells the whole story of a company's performance, and return on net assets is just one of many ratios used to evaluate a company's financial health.
If the purpose of performing the calculation is to generate a longer-term perspective of the company's ability to create value, extraordinary expenses may be added back into the net income figure. For example, if a company had a net income of $10 million but incurred an extraordinary expense of $1 million, the net income figure could be adjusted upward to $11 million. This adjustment does not accurately reflect the company's return on net assets in that year but might provide an indication of the return on net assets the company could expect in the following year if it does not have to incur any further extraordinary expenses.
Example of Return on Net Assets
A company has revenue of $1 billion and total expenses including taxes of $800 million, giving it 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 when calculating RONA. Dividing the net income of $200 million by $1 billion yields a return on net assets of 20% for the company.