What Is Return on Net Assets (RONA)?
Return on net assets RONA is a financial measurement tool that is calculated by dividing net profit by the total of fixed assets and net working capital.
The RONA ratio shows how well a company has managed and deployed assets in ways that have economic value. A higher ratio result indicates that management is extracting more income from each dollar invested in the asset. RONA is also used to measure how well a company is doing relative to others in its industry.
KEY TAKEAWAYS
Return on net assets (RONA) compares a company’s net profit to its net assets to show how well it uses those assets to generate income.
A high RONA indicates that the management is making optimal use of the company’s assets.
Net income and fixed assets can be adjusted for unusual or non-recurring items to arrive at the result of the normal ratio.
How Do You Calculate RONA?
Net income, fixed assets, and net working capital are the three components of RONA. Net income is found on the income statement and is calculated as revenue less expenses associated with making or selling a company’s products, operating expenses such as management salaries and utilities, debt-related interest expenses, and others All expenses.
Fixed assets, such as real estate and machinery, are tangible assets used in production. Working capital is calculated by deducting financial liabilities from total assets. It is important to note that long-term liabilities are not a part of working capital and are not deducted in the denominator while calculating working capital return on net assets ratio.
Sometimes, analysts will make some adjustments to the ratio formula entry to smooth or normalize the results, especially when compared to other companies. For example, keep in mind that a fixed asset balance can be affected by certain types of accelerated depreciation, where up to 40% of an asset’s value can be written off in the first full year of posting.
In addition, any significant event that resulted in a significant loss or abnormal income must be adjusted against net income, especially if these are one-time events. Intangible assets such as goodwill are another item that analysts sometimes exclude from the calculation, as they are often acquired simply through acquisition rather than being an asset purchased for use in the production of goods, such as equipment. new piece.
What Does RONA Tell You?
The return on net assets (RONA) ratio compares a company’s net income to its assets and helps investors determine how well a company is generating a return on its assets. The more a company’s revenue is in comparison to its assets, the more efficient the company is at deploying those assets. The RONA is a particularly important metric for venture capital firms, which have fixed assets as a primary component of their assets.
Interpretation of Return on Net Assets
A high RONA means that a company is using its assets and working capital effectively and efficiently, although no single account tells the full story of a company’s performance.
If the purpose of the calculation is to establish a long-term perspective of the company’s ability to create value, the extraordinary expense can be added back to net income. For example, if a company had net income of $10 million but incurred extraordinary expenses of $1 million, the net income figure could be adjusted to $11 million. This adjustment provides an indication of the return on net assets a company can expect in the coming year if it no longer has to incur any extraordinary expenses.
RONA Example
Let’s say a company has $1 billion in revenue and total expenses including taxes are $800 million, then its net income is $200 million. The company has current assets of 400 million US dollars and current liabilities of 200 million US dollars, which gives it a net working capital of 200 million US dollars.
Moreover, the fixed assets of the company is $800 million. In the RONA denominator, adding fixed assets to net working capital generates $1 billion. Net income of $200 million divided by $1 billion yields a return on net assets for the company of 20%.