Return on Net AssetsDefined with Formula and Examples

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What is Return on Net Assets (RONA)?

One function of the Return on Net Assets (RONA) is as a financial performance indicator.

The formula to arrive at RONA is to divide the Net Profit or Net Income by the total amount of fixed assets and net working capital.

RONA ratio shows the efficiency of management in terms of asset utilization.

A higher RONA ratio means the company is earning more through its invested assets. It can also be a performance comparison tool across other industries.

The formula for RONA is:​

retutrn on net assets

​Where:

RONA = Return on net assets

NWC = Net working capital (Current Assets – Current Liabilities)

How to Calculate RONA

The three components needed in calculating RONA are net income, fixed assets, and net working capital.

Net income is the line item in the income statement and is presented at the bottom part.

To arrive at net income, related expenses must be subtracted from the generated gross income.

Examples of related expenses are Operating Expenses (Admin and Selling Expenses, Depreciation expenses, interest expenses, etc. ).

Fixed assets are line items in the balance sheet which are described as tangible assets and are used for more than one accounting period.

Examples of fixed assets are machinery and equipment, office building, land, etc.

Goodwill is classified as an intangible asset and is excluded from tangible assets in the RONA calculation.

Net Working Capital is the difference between the current asset and the current liability.

It must be noted that only current balance sheet accounts such as current assets and liabilities are included in the NWC computation.

A company adjusts the RONA formula depending on the industry to which they are comparing its financials but also presents a fair and reasonable result.

For example, due to the need to accelerate the depreciation of a fixed asset, the effect of it is the asset could be eliminated by up to 40% of the asset value even if it is used up for just one accounting period.

Some adjustments in the net income should also be made when significant events occur like suffering from losses or a one-time event that negatively affects the company’s operation.

Goodwill is an intangible asset that is less likely to impact the RONA computation.

It is more of an equity-related computation rather than an operational asset.

What Does Return on Net Assets Tell You?

return on net assets

RONA is a profit indicator where investors usually focus their analysis on the company’s efficient utilization of assets thereby generating a higher profit rate.

The higher the RONA, the more effective and efficient the acquired assets are used in the business operations.

Capital-intensive companies rely more on the performance of their invested asset, especially fixed assets.

Another formula generated by capital-intensive companies is the below:

 Return on Net Assets = Net Assets / (Plant Revenue – Cost)

Interpreting Return on Net Assets

A higher return on net assets is an indication of effective asset performance.

A higher RONA also means assets and working capital are well-utilized and perform better than expected.

However, the RONA calculator does not entirely foresee the overall financial aspect of the company.

It is only one of many financial ratio calculators that helps in monitoring a company’s overall financial condition.

If the company wants to foresee its capability to generate more returns for a longer period, the recognition of an extraordinary expense is needed.

And it can be used to evaluate how much would need to be added to net income to arrive at more accurate returns.

For example, if a company computed its net income for $7 million, and the extraordinary expense incurred is $2 million, the net income and extraordinary expense are added to compute the adjusted net income.

The computed $9 million should be the company’s net income if the company expects that there are no extraordinary expenses.

Example of RONA

Triple A Company generated a net income of $800 million, and the expense incurred is $650 million, arriving at a $150 million net income.

With its current asset of $500 million and current liabilities of $250 million, its computed working capital is $250 million.

If the company’s fixed assets are $350 million, the RONA can be computed as follows:

RONA = $150M / ($350M + $250M)

RONA = 25%

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  1. Iowa State University "Financial Ratios" Page 1 . November 7, 2022