How to Improve the Return on Net Operating Assets

Return on net operating assets — also referred to as RNOA — is a financial metric used by analysts to evaluate company performance. RNOA is equal to net operating profit after taxes divided by net operating assets. The best way to improve a RNOA ratio is to increase net operating income.

RNOA is a variation of return on assets. Return on assets is found by dividing net income by total assets and RNOA is net operating profit after tax divided by net operating assets.

Financial analysts created the RNOA variation to hone in on operating activities. Whereas return on assets considers all types of profits — including investing and financing profit — and assets like investments and securities, RNOA is comprised of only operating activities. Many analysts see this as a better representation of how the core activities of the business are faring.

RNOA evaluates how much operating income a company derives relative to the operating assets it holds. An increasing RNOA means that a company is deriving more and more profit out of its operating assets. A higher RNOA is better than a lower one. However, benchmarks standards vary by industry.

Capital-intensive industries, like telecom, energy, gas, water and airlines, need lots of big-ticket operating assets to generate revenue. Because of large amount of assets they hold, the RNOA in these industries will almost always be higher than industries that don't need a lot of assets, like service-based industries.

To improve return on net operating assets, a company should strive for higher net operating income. Operating income comes from the sale of products and services.

One strategy a company can employ is to increase sales across the board. This can be accomplished by capturing a larger market share and improving marketing appeal while retaining existing customers. It also can try to lower operating costs — like cost of goods sold, selling costs, taxes, research and development, and administrative costs —which in turn increases net profit.

Net operating assets are total operating assets less operating liabilities. Technically, a company could increase it's RNOA by selling off operating assets. However, this is generally considered to be a bad strategy.

Since companies often sell off assets to cover debts, analysts see the sale of operating assets as an indicator that the business is not doing well. Also, if a company needs certain operating assets to generate revenue, selling these assets could tank sales and send the company into a downward financial spiral. For these reasons, it's best not to sell off assets just to improve financial ratios.