The term Return on Net Worth Ratio (RoNW) is the same as the return on equity ratio. The ratio shows how much profit a company generates with the invested money of equity shareholders. Hence, you can also call it a Return on Equity Ratio. This ratio is quite helpful for comparing the profitability or annual return of a company to that of others in the same industry.
RoNW (Return on Net Worth) FAQ
Return on Net Worth (RONW) is a calculation of the profitability of a company expressed in percentage. The RoNW is calculated by dividing the net income of the firm in question by shareholders’ equity. So, the ratio is developed from the perspective of the investor and not the company.
To get annual net income, total revenue should be subtracted from total liabilities. Shareholders’ equity implies the invested money of shareholders. The formula of RoNW is as the ratio shows how much profit a company could generate from shareholders’ equity.
Yes, ROE (Return on Equity) is also RoNW (Return on Net Worth). You can calculate it to know the profitability percentage.
A rising RoNW reflects that a company is increasing its ability to generate profit without having as much capital. It also means how well a company’s management is using the shareholders’ capital. In other words, the higher the RoNW the better the company prospectus. Falling RoNW is generally a problem.
Return on Net Worth Calculation
Now, Return on the net worth ratio or RoNW calculation contains net income and shareholders’ equity. Here net income means the profit of a company for a particular fiscal year. In order to get annual net income to subtract the total revenue from total liabilities. Shareholders’ equity refers to the invested money of shareholders. The formula of RoNW is as follows:
The ratio shows how much profit a company can generate from shareholders’ equity.
Importance of Return on Net Worth Ratio (RoNW)
- Generally, it is an indicator of fundamental analysis.
- RoNW ratio interprets how efficiently a company uses shareholders’ money to generate maximum profit.
- The higher the RoNW ratio, the more efficient the company is for using shareholders’ equity.
- Besides this, Investors always prefer a high RoNW ratio of a company for maximum profit.
- A comparison of the RoNW ratio between two companies within the same industry is quite important for long-term investment.
Positive and Negative Return on the net worth ratio
It interprets the company has great management at generating shareholders’ returns. This indicates how wisely a company can invest the amount and increase productivity and profit. It shows the company can generate more assets to cover its liabilities. Therefore, undoubtedly it is a safe investment choice.
In contrast, a decreasing return in net worth means the company is making a poor decision and their equity management efficiency is not good at all. So it is clear that a company with a negative return on net worth has more debt and not a safe investment choice.
Moreover, as I mentioned lower Return on net worth is not good for investing, so investors generally prefer a company with a high RoNW ratio. There is a certain scale by which one can measure the high and low ratio. Generally, a minimum 15% Return on net worth indicates better valuation and profitable stock and below 10% RoNW considers as poor rates for a company.
So, this chart shows five years of RoNW or ROE. RoNW or ROE of 2005 is below average. Therefore that time it was not profitable. One of the most important points regarding ROE ratio analysis is an average of 5 to 10 years return on net worth give a better picture of the growth of a company.
However, this is a fundamental indicator and is certainly an important tool in terms of investment.