Other word for equity or the residual interest in the assets of the entity after deducting all its liabilities.
Companies with negative net assets (or individuals with negative net worth) are usually in a lot of trouble. Frequently, one solution is to sell off assets in order to generate cash and pay down debt. Companies may also try to renegotiate their existing debt to lower the payments or principal due. Firms can also file for Chapter 11 bankruptcy, which allows them to restructure their debts. If none of these tactics are successful, a firm with negative net assets will eventually end up in Chapter 7 bankruptcy and will be liquidated.
To calculate a company’s ability to generate profits from its net assets, an analyst can use the return on net assets (RONA) profitability ratio.
Return onfixed assets combined with working capital.is a metric which measures a company’s financial performance with regard to
How does it work?
Return on net assets (RONA) is calculated by dividing a company’s net income in a given period by the total value of both its fixed assets and its working capital. Increases in RONA indicate higher levels of profitability.
RONA = Net Income / (Fixed Assets + Working Capital)
For example, suppose that company XYZ owns, in a given period, $500k in fixed assets accompanied by $300k in working capital. In the same period, XYZ generates $200k in net income. XYZ’s RONA would be calculated in the following way:
RONA = $200,000 net income / ($500,000 A Fixed + $300,000 C Working) = $200,000 net income / $800,000 A Fixed and C Working = 25%
In this instance, XYZ generated a 25% return on its working capital combined with its fixed assets. The higher a RONA the more efficient a company is using its net assets.
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