Return on Net Assets (RONA)
The return on net assets (RONA) is a comparison of net income with the net assets. This is a metric of financial performance of a company that takes into account earnings of a company with regard to fixed assets and net working capital.
The return on net assets (RONA) helps the investors to determine the percentage net income the company is generating from the assets. This ratio tells how effectively and efficiently the company is using its assets to generate earnings. This is an important ratio because in many companies the fixed assets are a single largest component of the investment.
Although there are no fixed standards or benchmarks for RONA but the higher this ratio is the better it is. Higher RONA means that the company is using its assets and working capital efficiently and effectively. An increasing RONA is an indicator of improving profitability and improving financial performance of a company.
This ratio should usually be used in capital-intensive industries where major purchases are for fixed assets. It should be used in subsequent years to see how effective the investment in new fixed assets has been.
The return on net assets (RONA) is calculated by dividing the net income of a company by the sum of its fixed assets and net working capital. This can be expressed in the following formula.
Return on Net Assets = Net Income / (Fixed Assets + Net Working Capital)
The figure for net income can be found in the income statement. Net income is also known as profit after tax. The figure for fixed assets can be found in the balance sheet. Fixed assets include property, plant and equipment, long term investments, and other non-current assets. The net working capital is defined as current assets minus current liabilities.
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