RNOA denotes return on net operating assets; it is 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 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 = operating income/ net operating assets
RNOA = (profit – taxes)/ 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.
