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Return on Net Assets ( RONA )
Written by Kenny Foo   
Monday, 09 March 2009 11:07

Investment Formula Description

Return on Net Assets ( RONA ) is the investment formula to measure of financial performance of a corporation which take use of assets into account.

 Return on Net Assets ( RONA ) can be obtained by dividing net profit with fixed assets and working capital. Some investors confuse return on equity ( ROE ) with return on Net Assets ( RONA ). In fact, both investment formula has a slight difference as following.

 

Difference between return on equity ( ROE ) and return on net assets ( RONA )

Return on equity ( ROE ) = Net profit / Shareholders' Equity

Return on equity ( ROE ) = Net profit / ( Total Assets - Total Liabilities )

Return on equity ( ROE ) = Net profit / (( Fixed Assets + Current Assets ) - ( Long Term Liabilities + Current Liabilities )) 

Return on net assets ( RONA ) = Net profit / ( Fixed Assets + Working Capital )

Return on net assets ( RONA ) = Net profit / ( Fixed Assets + ( Current Assets - Current Liabilities ))

In this case, the investors can see that long term liabilities is not taken into account for return on net assets ( RONA ). Hence, return on net assets ( RONA ) is same with return on equity ( ROE ) except it didn't take long term liabilities into account.

 

Investment Formula

Return on Net Assets ( RONA ) = Net income ( NI ) or net profit / ( Fixed Assets + Working Capital )

 

Investment Formula Examples

Corporation A has $125,000 fixed assets, $75,000 current assets, $ 12,000 non current liabilities, and $ 25,000 current liabilities. For this financial year, Corporation A has $80,000 net profit. The difference between return on net assets ( RONA ) and return on equity ( ROE ) is as following. 

Return on net assets ( RONA ) = Net profit / ( Fixed Assets + ( Current Assets - Current Liabilities )) = 80,000 / ( 125,000 + ( 75,000 - 25,000 )) = 80,000 / 175,000 = 0.457

Return on equity ( ROE ) = Net profit / (( Fixed Assets + Current Assets ) - ( Long Term Liabilities + Current Liabilities )) =  80,000 / (( 125,000 + 75,000 ) - ( 12,000 + 25,000 )) = 80,000 / 163,000 = 0.491

For return on net assets ( RONA ) , corporation A has 0.457 while for return on equity ( ROE ), corporation A has 0.491. The difference with counting non-current liabilities for return on equity ( ROE ) and not counting non-current liabilities for return on net assets ( RONA ) make both investment formula to have different outcome for corporation A.

 



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Last Updated ( Tuesday, 10 March 2009 11:55 )
 
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