Question

Describe the differences between Return on Net Operating Assets (RNOA) and Return on Common Equity (ROCE). Include your opinion on which metric is more beneficial to financial statement analysis. Be sure to comment beyond discussing the formula for computing the two ratios. Which metric is more beneficial to financial statement analysis. Be sure to comment beyond discussing the formula for computing the two ratios.

Answer 1

Return on net operating assets will be successfully separating the financial and operating decisions which are made by the company and then it will be calculating the return because it will be always having upper hand while being compared with return on equity because return on equity does not offer with this differentiation as it is a plane straightforward method of calculation of the overall rate of return which has been generated on the equity capital by the company.

Return on equity will be the most popular Matrix which are used by various analyst in order to generate the overall rate of return which has been generated by the company on its overall use of equity capital and this will represent the total return made for the equity shareholders but return on net operating asset will be taking the return on equity calculation one step further by segregating it in respect to the operating income and financial activities and it will be reflecting the effectiveness of the company in order to generate return on the operating activities and financial income separately so it will be providing a better perspective for various stakeholders of the organisation about the effectiveness of use of Assets on the operational front and financial front.

Return on equity can be leading to wrong estimation of the performance of the company whereas return on net operating asset as it will be providing you with a better reflection of the performance of the company after separating it performance on the operational front and it can be used for the longer term as it can used to estimate the performance of the company in the long run so I WILL ALWAYS BE PREFERRING RETURN ON NET OPERATING ASSET (RNOA) because it is a better measure for assessment of the ability of the company to generate income and return over its operating assets so it will be segregating both the operating activities and the financial activities return.