Understanding the concept of Return on Net Assets (RONA)
Business owners and Chief Financial Officers (CFOs) want to see that they are achieving financial stability while making the most of the assets they already have. Understanding the concept of RONA and how to best utilize it is an important part of every organization’s financial analysis toolkit. Discover how RONA can help your company achieve financial health and longevity.
What is Return on Net Assets (RONA)?
Return on Net Assets (RONA) is a financial ratio that measures how effectively a company uses its assets to generate profitable earnings. RONA takes a company’s net income or profit revenue and divides it by the total assets. Used to measure the efficiency of any business’ fiscal performance, RONA is utilized to forecast more accurately how much money it can effectively squeeze out of its available resources. This basic equation is helpful for any company looking to boost its return on net assets while maximizing profit.
Benefits and Drawbacks of Return on Net Assets (RONA)
Essentially, RONA shows how much profit a company makes relative to its goals and objectives. However, there are some benefits and drawbacks to using this ratio. It’s important to understand these drawbacks before you use this ratio in your business aligned with Lean Six Sigma principles.
1. The main advantage of this performance ratio is that it is easy to measure and understand.
Divide the profit by the number of assets your company holds, and you will have your Return on Net Assets (RONA) result. The higher the RONA result, the better.
2. An additional benefit of RONA is that it assists in evaluating the company’s ability to fully utilize its available assets while generating profit, regardless of varying capital structures.
This method may lead to the development and implementation of new revenue growth and budget management strategies to help the company reap the benefits of its assets while increasing cost savings.
3. One major drawback of using Return on Net Assets (RONA) to calculate a company’s fiscal performance is that it does not consider the type, convertibility, or age of the assets calculated.
While some are easily converted, other assets may not be readily accessible, such as specific physical properties and operating and non-operating assets.
4. Another drawback of RONA is that it doesn’t detail the numerous factors impacting a company’s profits.
Much like a family’s financial health is affected by inflation, a company’s RONA is also influenced by external factors, such as fluctuating market circumstances and rising costs of assets.
Why is Return on Net Assets (RONA) Important to Understand?
Process improvements are at the core of any iSixSigma and Lean Sigma program. When RONA is considered and regularly measured over time, the outcome can determine what direction a company’s growth is heading.
Suppose a RONA result indicates that a company is falling behind. In that case, companies can take the initiative to create and execute several process improvement strategies to enhance profitability and operational efficiency.
When RONA outcomes increase steadily, the company’s assets are well utilized to grow profits. Increasing or decreasing RONA calculations are helpful to determine the company’s current financial status, potentially resulting in beneficial changes combined with iSixSigma best practices.
An Industry Example of Return on Net Assets
The exact formula for RONA varies in phrasing, but it generally looks like RONA = Net Income divided by Net Assets. To fully understand how to calculate your company’s RONA percentage accurately, it helps to see an illustration.
For example, say you manage a third-party logistics business. If your business has a net income of $20,000 with assets of $55,000, your RONA would be 36.6 percent. To increase your company’s RONA result, you’d need to increase the net income or lower the asset value to similar amounts.
3 Best Practices When Thinking About Return on Net Assets (RONA)
Although the RONA formula is simple and easy to understand, there are a few best practices to consider before diving in.
1. It helps to know where you stand among your competition.
Compare your RONA percentage with industry competitors to see where you match up and where you can improve.
2. To get the most accurate RONA, use the most accurate net income figures.
Check your income statement to see your total profits without business expenses included.
3. Your assets include your liabilities.
Calculate your assets by adding your company’s liabilities to your company’s equity.
Frequently Asked Questions (FAQ) about Return on Net Assets (RONA)
Is Return on Net Assets (RONA) the same as Return on Equity (ROE)?
No, RONA is not quite the same as ROE, although the basis of both is similar. With RONA, debt is also equated, while ROE only determines the return on equity.
Are RONA and Return on Investments (ROI) the same?
Much like the comparison of RONA and ROE, the purpose of ROI and RONA are similar in nature. ROI is calculated by identifying profits rendered through investment capital, and RONA is calculated by determining profitability after purchasing company assets.
Is RONA required for each business?
Although RONA is a helpful addition to your array of financial analysis tools, its use is not required to determine your company’s financial health.
Track Your Company Performance with Return on Net Assets (RONA)
Accurately monitoring assets and profit are vital to any company’s stamina and finding out where your company stands among your competition. Using RONA will give investors a deeper look into your financial management methods and help you navigate today’s evolving business landscape.