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Return On Net Assets

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RONA

Measuring Company Success: Summary of Return On Net Assets - RONA. Abstract

 

Return On Net Assets (RONA) equals the Net Operating Profit After Tax divided by the sum of cash, the working capital requirement and the fixed assets. A strong virtue of using RONA compared to traditional methods for measuring company success is that it also considers the assets a company uses to achieve its output.

 

It is similar to EVA [EVA = (RONA-WACC) x invested capital].

However using RONA instead of EVA is generally not recommended, because managers might bypass value-creating activities because they would reduce RONA (a risk if RONA is greater than WACC), or they might undertake value-destroying activities because they would increase RONA (if RONA is less than WACC).

 

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

Formula:

      Net Sales

-    Operating Expenses

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

      Operating Profit (EBIT)

-    Taxes

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

      Net Operating Profit After Tax (NOPAT)

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

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

      Return on Net Assets

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

Book: Ciaran Walsh - Key Management Ratios -

 

Compare:  EBIT  |  EBITDA  |  Economic Value Added  |  Earnings Per Share  |  Return on Equity  |  Net Present Value  |  Return On Investment

More valuation methodologies

   
 

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2016 Value Based Management.net - Last updated: Jan 6th, 2016 - All names by their owners

 

Summaries of 2,000 management methods