What it means
Total assets include items that have little to do with day to day trading, such as surplus cash sitting on deposit or a property held purely as an investment. RONA narrows the base to fixed assets plus net working capital, which is the money locked up in stock and customer invoices less what suppliers are owed.
The result is a cleaner read on how hard the operating asset base is working. Managers care about it because it links the income statement and the balance sheet in a single number.
Two divisions can report identical profit, yet the one that achieves it with half the inventory and half the machinery is creating far more value for the group. It is calculated as net income divided by the sum of fixed assets and net working capital, with net working capital being current assets less current liabilities.
Some firms use the average of opening and closing net assets rather than the closing balance, which is fairer to a business that has just bought a large piece of equipment. Others swap net income for operating profit after tax so that interest costs stay out of the numerator.
RONA is a popular divisional target because local managers can influence it through stock levels, credit control and capital spending. That is also its weakness: a manager can improve the ratio simply by refusing to replace ageing equipment, which flatters the percentage while quietly damaging the business.
Comparisons only mean something within an industry, because asset intensity varies enormously between sectors. A software firm with almost no fixed assets can post a RONA above 40% while a well run steel mill reaches 10%, and neither figure says anything useful about the other.
In practice
Real-world examples.
Example
A frozen food producer holds twelve weeks of finished stock to cover seasonal demand. Cutting that to eight weeks releases $2,000,000 of working capital, so net assets fall from $20,000,000 to $18,000,000 and RONA on net income of $1,800,000 rises from 9% to 10% without a single extra sale.
Example
An engineering group sets a RONA hurdle of 15% for every divisional capital request. A plant manager who wants a $4,000,000 press has to show it will add at least $600,000 of annual net income, which forces a much harder look at the utilisation forecast.
Example
A supermarket chain sells its distribution centres and leases them back. RONA jumps because the fixed asset base has shrunk, but the finance director points out that lease commitments have simply replaced owned assets and underlying trading has not improved.
Think of it
“RONA measures how much profit you generate from the assets actually employed in running the business.
Formula
Calculation
RONA = Net income / (Fixed assets + Net working capital)
Net working capital = Current assets - Current liabilities
A packaging manufacturer reports net income of $3,600,000 for the year. Its fixed assets stand at $22,000,000, its current assets at $12,000,000 and its current liabilities at $4,000,000.
Net working capital = $12,000,000 - $4,000,000 = $8,000,000.
Net assets = $22,000,000 + $8,000,000 = $30,000,000.
RONA = $3,600,000 / $30,000,000 = 0.12, or 12%.
If the company tightened stock control enough to bring net working capital down to $5,000,000, the net asset base would fall to $27,000,000 and RONA would rise to $3,600,000 / $27,000,000 = 13.3%, with no change in profit at all.Case study
Seen in the real world.
This illustrative story features Calder Precision Components, a fictional maker of machined parts with three plants. Group profit had been flat for four years while the balance sheet kept growing, and nobody could explain where the money was going.
Introducing RONA as the main divisional measure made the picture obvious. The southern plant earned $1,200,000 on net assets of $6,000,000, a return of 20%, while the northern plant earned $1,500,000 on net assets of $25,000,000, a return of just 6%. The northern plant had been quietly accumulating raw material stock and machine capacity for a contract that ended two years earlier.
In this fictional example, management left profit targets untouched and simply asked the northern plant to bring its net assets below $15,000,000 within eighteen months. Selling redundant machines and halving raw material cover took group RONA from 8.7% to 12.9%, and released cash that funded a new order handling system.
Watch out
Common mistakes.
- Confusing net assets in this ratio with the accounting definition of net assets, which is total assets less total liabilities and equals shareholders' equity.
- Rewarding a divisional manager for a rising RONA without checking whether it came from deferred maintenance and unreplaced equipment.
- Comparing RONA across industries with completely different asset intensity and concluding that one management team is better than another.
Questions
People also ask.
How is RONA different from return on assets?
Return on assets uses the whole balance sheet, while RONA strips out non-operating items and nets current liabilities off current assets, giving a tighter operating base.
Should the calculation use opening, closing or average net assets?
Average is the fairer choice in any year with significant investment or disposal, though many companies use the closing balance for simplicity.
What is a good RONA?
It depends entirely on the sector, but a useful test is whether the figure comfortably exceeds the company's cost of capital rather than whether it beats a fixed benchmark.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%