ROE vs RNOA

In finance, equity is the interest or claim of shareholders on the assets of a company after all its liabilities are liquidated. Shareholders’ equity or stockholders’ equity is the interest on the company’s assets that is divided among all shareholders of common stock.

When a business is established, the funds that investors put up as capital causes it to incur liabilities. To come up with the shareholders’ equity, all liabilities must be deducted from its assets, and the remainder comprises the shareholders’ equity or interest in the business.

There are two methods of measuring shareholders’ equity. One is the Return on Equity (ROE) which is the measure of shareholders’ equity on a company’s common stocks. It shows how a company skillfully manages its funds to produce maximum interest and growth.
To come up with a company’s ROE, all assets including long term (equipment and capital) and current ones (receivables and cash) are added. Its long term (debts that do not have to be paid within the year) and current (accounts payable and employees’ salaries) liabilities are also added. The total liabilities are then subtracted from the total assets.

Return on Net Operating Assets (RNOA), on the other hand, is the measure of a company’s capability to create profit from each piece of equity. It calculates the amount that a company earns for each dollar that it invests. A company’s net income before tax (profit before tax) is divided by its total assets to come up with its RNOA. It is also known as a profitability or productivity ratio that gives owners an idea of how well their company is doing based on their goals, competitors, and the industry as a whole.

Computing the RNOA involves the inclusion of assets incurred from its liabilities which is not very useful for investors but is a good measure of the profitability and performance of the different divisions of the company. It is a good internal management ratio and is most suitable for companies that have large capitalization. While a company’s liabilities are not included in computing the RNOA, they are included in the computation of ROE. The dividends paid to preferred shareholders are also subtracted from the net income.

Summary:

1.ROE is Return on Equity while RNOA is Return on Net Operating Asset.
2.The formula for ROE is net income after taxes divided by shareholder equity while the formula for RNOA is net income divided by total assets.
3.The computation of ROE includes the deduction of all liabilities and preferred dividends from all assets while the computation of RNOA does not include this.
4.The ROE is computed after taxes while the RNOA is computed before taxes.
5.While RNOA is a good internal management ratio, ROE is a good gauge for investors on how well their funds are utilized to generate more profit.
6.ROE is a good tool for determining how well a company does compared to other companies in the same industry while RNOA is not as good.

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