Return On Net Assets
(RONA)

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Summary

What is Return On Net Assets.

RONA or Return On Net Assets is equal to Net Operating Profit After Tax divided by: cash plus the working capital requirement plus the fixed assets. A strong virtue of using RONA compared to traditional methods for measuring company success is that RONA also considers the assets which a company uses to achieve its output.

Return On Net Assets compared with EVA

Return on Net Assets is similar to EVA [EVA = (RONA-WACC) x invested capital].

However using RONA instead of EVA is generally not recommended. The reason for this is that managers might bypass value-creating activities, because that might reduce RONA. A risk if RONA is greater than WACC. Or they might undertake value-destroying activities because that would increase RONA. If RONA is less than WACC.

Although RONA does not explicitly measure capital charges, it does remind managers that there is a cost to acquiring and holding assets. But ultimately, maximizing of EVA should rather be seen as the key to financial success than maximizing of RONA.

Calculation of Return on Net Assets. Formula

      Net Sales

-     Operating Expenses

------------------------------------------------

      Operating Profit (EBIT)

-     Taxes

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      Net Operating Profit After Tax (NOPAT)

/     Net Assets (= cash+working capital requirement+fixed assets)

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      Return on Net Assets (RONA)

Book: Steven M. Bragg - Business Ratios and Formulas : A Comprehensive Guide

Book: Ciaran Walsh - Key Management Ratios

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