# Return on Net Assets (RONA) Explained: Definition, Formula & Example

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*— Investopedia / Sydney Saporito*

> **Definition**
>
> Return on Net Assets (RONA) is a performance metric that measures a company's net profit relative to its total net assets, indicating how effectively it is utilizing those assets to generate earnings.

## What Is Return on Net Assets (RONA)?

Return on net assets (RONA) is a measure of financial performance that shows how well a company and its management are deploying assets. It is calculated as net profit divided by the sum of [fixed assets](https://www.investopedia.com/terms/f/fixedasset.asp) and net working capital. Net profit is also called [net income](https://www.investopedia.com/terms/n/netincome.asp).

RONA is particularly relevant to capital-intensive industries. A high ratio result indicates that management is squeezing more earnings out of each dollar invested in assets. RONA is also used to compare a company's performance to competitors in its industry.

### Key Takeaways

*   Return on Net Assets (RONA) evaluates how effectively a company uses its assets to generate profits.  
    
*   The RONA formula is Net Profit divided by the sum of Fixed Assets and Net Working Capital.  
    
*   High RONA indicates efficient asset utilization by management in generating earnings.  
    
*   Fixed assets in RONA exclude intangible assets like goodwill, focusing on tangible property.
*   RONA is crucial for capital-intensive industries where fixed assets are significant.

## How to Calculate the Return on Net Assets Formula

﻿ $\begin{aligned}&RONA=\frac{\text{Net profit}}{\text{(Fixed assets}+NWC)}\\&NWC=\text{Current Assets }-\text{Current Liabilities}\\&\textbf{where:}\\&RONA=\text{Return on net assets}\\&NWC=\text{Net working capital}\end{aligned}$﻿

## Calculating RONA: A Step-by-Step Guide

The three components of RONA are net income, fixed assets, and [net working capital](https://www.investopedia.com/terms/w/workingcapital.asp). Net income, found in the income statement, is revenue minus all expenses, including production, operating, management, utilities, and interest.

Fixed assets are tangible property used in production, such as real estate and machinery, and do not include [goodwill](https://www.investopedia.com/terms/g/goodwill.asp) or other [intangible assets](https://www.investopedia.com/terms/i/intangibleasset.asp) carried on the balance sheet. Net working capital is calculated by subtracting the company's current liabilities from its current assets. It is important to note that long-term liabilities are not part of working capital and are not subtracted in the denominator when calculating working capital for the return on net assets ratio.

At times, analysts make a few adjustments to the ratio formula inputs to smooth or normalize the results, especially when comparing to other companies. For example, consider that the fixed assets balance could be affected by certain types of accelerated depreciation, where up to 40% of the value of an asset could be eliminated in its first full year of deployment.

Adjust net income for any major events causing unusual gains or losses, especially if they are one-time only. Intangible assets such as goodwill are another item that analysts sometimes remove from the calculation, since it is often simply derived from an acquisition, rather than being an asset purchased for use in producing goods, such as a new piece of equipment.

## Interpreting RONA: Insights and Implications

The return on net assets (RONA) ratio compares a firm's [net income](https://www.investopedia.com/terms/n/netincome.asp) with its assets and helps investors to determine how well the company is generating profit from its assets. If a firm's earnings are high relative to its assets, it uses its assets effectively. RONA is an especially important metric for capital intensive companies, which have [fixed assets](https://www.investopedia.com/terms/f/fixedasset.asp) as their major asset component.

In the capital-intensive manufacturing sector, RONA can also be calculated as:

$\text{Return on Net Assets}=\frac{\text{Plant Revenue}-\text{Costs}}{\text{Net Assets}}$

### Interpreting Return on Net Assets

The higher the return on net assets, the better the profit performance of the company. A higher RONA means the company is using its assets and working capital efficiently and effectively, although no single calculation tells the whole story of a company's performance. Return on net assets is just one of many ratios used to evaluate a company's [financial health](https://www.investopedia.com/terms/f/financial-health.asp).

If the purpose of performing the calculation is to generate a longer-term perspective of the company's ability to create value, [extraordinary expenses](https://www.investopedia.com/terms/e/extraordinaryitem.asp) may be added back into the net income figure. For example, if a company had a net income of $10 million but incurred an extraordinary expense of $1 million, the net income figure could be adjusted upward to $11 million. This adjustment provides an indication of the return on net assets the company could expect in the following year if it does not have to incur any further extraordinary expenses.

## RONA Example: Understanding the Calculation

Suppose a company earns $1 billion in revenue with $800 million in total expenses, resulting in $200 million in net income. With current assets of $400 million and liabilities of $200 million, the company has $200 million in net working capital.

Further, the company's fixed assets amount to $800 million. Adding fixed assets to net working capital yields $1 billion in the denominator when calculating RONA. Dividing the net income of $200 million by $1 billion yields a return on net assets of 20% for the company.