True or False? Increasing a company’s net operating profit margin increases both RNOA and ROCE.

True or False?

Increasing a company’s net operating profit margin increases both RNOA and ROCE.

Solutions

Expert Solution

RNOA stands for return on net operating assets

It means the return that is received on operating assets i.e the assets actually used for generating revenue in company . It indicates the income generated from assests.

RNOA = Net Operating Profit after tax/ Net Operating Assets.

ROCE stands for return on capital employed

It is a measure used for comparing the profitability of the company against the amount of capital used.

ROCE= Earnings before Interest and Tax/Capital Employed

EFFECT OF NET OPERATING PROFIT MARGIN

A) ON RNOA

RNOA = ( Net Operating Profit after tax/ sales) × (sales/Average Net Operating assets)

Therefore there is direct relationship between the net operating profit margin and RNOA as net operating profit is one of its component. The increase in margin will directly increse the RNOA

B) ON ROCE

The earnings before interest and tax is also known as operating income but the NET OPERATING PROFIT MARGIN is calculated net of tax so the increase in margin affects the ROCE but not by the same percentage the increase percentage reduces by the effect of net of tax percentage.

Thus the given statement is true the increasing net operating profit margin increases the RNOA and ROCE

ekkarill92 answered 1 year ago

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