RONA ( Return On Net Asset)

malli

Please can someone help me to understand how to calculate RONA?

I am practicing June 2009 PEV Section2


RONA for product UFALL 17%
RONA for product KLINEC 21%

I cannot find anything in my BPP book 2007 and I haven't found anything useful on the Internet.




Thank you in advance

AK002

RONA is Return on Net Assets.

Return is Profit, so take the net profit and divide it by the Net assets and multiply by 100%.

sdv

When answering the ratio question,

1 calculate the ratio
2 explain the ratio – what does it mean
3 explain why there is a difference between the two calculations and link it with other ratios
4 what action is needed to improve

Return on net assets is 17% for Ufall and 21% for Klineec

Net assets = Equity therefore the above figures indicates return on equity.

The return on the equity (RONA) for the competitor is 4% higher then returns on our company. The higher returns will give better the ratio.

Both the investors and banker will use this ratio for decision purposes.

The main reason for lower ratio for our company is that the gross margin of Klineec is 22% higher then our company’s however, the expenses as a percentage of sales for Klineec is 53%( 61-8) while ours is 25% (43 -18). The main reason for this difference is the advertising costs. Klineec’s expense as a percentage of sales is 45% compared to our company’s 5.5%.
The higher expenditure on advertising is reflected in the asset turn over. Klineec’s is 4 time compared with ours of 2 times. (though I would have expected a higher ration then this)

Although Klineec’s gross margins are much higher then ours , that is not reflected in the bottom line. The returns on the Net assets (or equity) is only 4% difference. To increase our company's RONA we need to improve the gross margins.

Shab

basically return on net asset is NET PROFIT/NET ASSET *100 this calculation tell u that how much return you get from the investment u made on asset

malli

Thanx a million for all your replies - that really helps as always!!!