Question

Why do firms do not include interest expense in the calculation of RNOA? Give an example.

Answer 1

Interest expense is not included while calculation of return on net operating assets because interest income is not treated as a operating income, and interest expense is not treated as an operating expense because these are non operating in nature.

it is because when you borrow money, it brings in cash but that is not operating cash, so when you will pay the interest that is not operating cash either. Interest is not a part of day to day operations of the business so, it is not included in the the return on net operating assets because it is not the part of the operation of the company.

so it can be said that the firm will not be including the interest expense in calculation of return on net operating assets.

It can be exampled that, all those company who will pay the interest will not be taking them for calculation of the operating income or operating expenses because they are not the part of the day to day operations unless it is a financial company.