Return On Net Assets

Category: Financial.

RONA – It may sound like some fancy name for a fancy person, but it’s actually the name of a finance formula – albeit one that is just as fancy. This performance ratio can compare the generated income from a company to fixed assets needed to get the income. Hence, with this formula, you can measure a company’s efficiency as it generates the returns on its owned assets.

Defining Return On Net Assets

For many businesses, the fixed asset is an investment’s biggest component. As a result, you may want to understand exactly how much income is produced by these by these assets. You ought to know if the company is making effective use of its resources – or if it’s losing on cash on the incremental investments.

The return on net assets can also offer a time period sense in which an investment can return back to the investor. A better utilization of these assets can generate a high return – making the company much more profitable. This way, the company will have a better ability to return money to the investors.

There aren’t any fixed standards for RONA; technically speaking, the higher the ratio, the better. A high RONA may imply that the company is making full use of its assets – in an effective and efficient manner. An increasing return on net assets can also show a profitability improvement, as well as a better financial performance of a particular business.

Formula to Remember

The ROA is found through the division of the net income with the sum of working capital plus fixed assets. As a result, the formula will look as follows:

RONA
=
Net Income(Working Capital + Fixed Assets)

The formula may change if you are in the manufacturing sector. For example, a plant-specific formula may have the following formula.

RONA
=
(Plant Revenue – Costs)(Working Capital + Fixed Assets)

For the first equation, most of the numbers can be found in the company’s annual report. Sometimes, you may not be able to find them in the income statement or the balance sheet; instead, try to look into the discussion section and the notes to accounts. This way, you may be able to get more information on them.

On the other hand, for the second equation, you may want to dig a little deeper. Information at the plant level is not always made public and can sometimes only be accessed by the M&A analyst or the company management. If you are merely an investor, you may stumble across some trouble on the road.

The manufacturing companies, on the other hand, can hold onto plant-level data on assets, operating costs, as well as sales. If you manage to get your hands on the information, then you may be able to find out the return on net assets.

In the end, the process is certainly not easy – and you may have to do a fair amount of digging. However, this formula can offer a good insight into a company’s management – which is why every investor should know how to apply it.

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