A measure often used to assess the efficiency of an entity’s operations and to compare the profitability of different entities operating in the same industry/ sector. This measure  of profitability or performance (known for short as RNOA) is determined using the following formula:

RNOA= NOPAT/ average ROA

Where: NOPAT denotes net operating profit after tax; ROA is return on assets.

It is also expressed as follows (RNOA formula):

RNOA = (profit – taxes)/ net operating assets

RNOA = operating income/ net operating assets

It entails that profitability must be based on the net assets invested in operations. Using this measure, an entity can increase its operating profitability by operating on extended credit terms (in its relationship with its suppliers and other stakeholders). Credit has the potential to reduce the investment sourced based on shareholders’ equity. Similarly, the net interest rate, by excluding non-interest bearing liabilities from the net operating assets, provides the appropriate interest rate (as an expense) for the financing activities.