Question

3 What is the difference between the traditional ROA measure (part of the traditional DuPont analysis) and the return on net operating assets (RNOA)? 4 Explain how return on net operating assets (RNOA) and financial leverage (FLEV) affect Return on Equity (ROE). Is greater FLEV always better? 5 Explain the trade-off between net operating profit margin and net operating asset turnover. 6 What is liquidity? Identify and discuss two ways to measure a company's liquidity. 5. What is solvency? Identify and discuss two ways a company's solvency is measured.

Answer 1

(3) Return on Asset (ROA) is a profitability ratio that provides how much profit a company is able to generate from its assets or it measures how efficient a company's management is in generating earnings from their economic resource ( Total Assets of balance sheet).

Return on net operating assets is calculated as

= ( Net Income) by (fixed assets +net working capital)

The main objective of calculating Return on Net Operating Asset ( RNOA) is that it is a good indicator of how well a company uses operating assets to create profit.The Return on Net Operating Assets (RNOA) COVERS THE RETURN ON THE COMPANY'S ASSETS THAT ARE GENERATING REVENUE.

Though Return on Net Operating Assets (RNOA) is a derivation of Traditional Return on Assets which uses fixed assets and net working capital in its calculation rather than total assets.Return on Net Operating Assets mainly determines the efficiency and effectiveness of companies use of its assets.