It stands for return on net assets; a profitability ratio in which only interest-bearing debt along with equity are taken into account in calculation. This ratio compares earnings available to owners and creditors to the assets financed by those owners and creditors. It results from multiplication of profit margin by asset turnover:
RONA = asset turnover x profit margin
It is also expressed as:
RONA = NOPAT/ capital
Where NOPAT is net operating profit after taxes. It follows that:
For example, a company has reported $50,000, $20,000, $300,000, and $300,000 in net income, interest expenses, equity, and interest-bearing debt, respectively. If corporate tax rate is 35%, then its RONA is:
or 10.5%
This means every dollar provided by owners and creditors produces 10.5 cents.
