The term Return on Net Worth Ratio (RoNW) is the same as the return on equity ratio (ROE). 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.
Definition of Return on Net Worth
Return on Net Worth is a ratio calculated from the investor’s perspective rather than the company’s. The investor may assess whether he will receive the complete net profit or how much return he will receive by looking at this. It describes how the companies generate a profit using their shareholders’ capital. If we decide to invest in a company’s stock, we must pay close attention to its return on net worth (RoNW). Though the net worth includes dividend and exclude all taxes.
Return on Net Worth Calculation
Now, the 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 the total liabilities. Shareholders’ equity refers to the invested money of shareholders. The formula of RoNW is as follows:
Return on Net Worth =Annual Net worth of the company/shareholders’ equity capital. Let us calculate the following,
Suppose a company has a net worth of 10,00,000cr and their shareholding equity is 50,000cr then the company’s RoNW will be 20%. the full calculation is already shown to you in the above image.
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.
- The 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 in 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 is not a safe investment choice.
Moreover, as I mentioned lower Return on net worth is not good for investing, so investors generally scan for 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 a poor rate for a company.
Example of RoNW
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 gives 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.
Ideal RoNW Ratio
As I am updating this post, it is important to let you know what is an ideal RoNW ratio. If a company has a 15% of RoNW ratio then the company has a bare minimum RoNW ratio. That means the company is in good stable condition and they are growing step by step.
A lower than 15% is a bad RoNW ratio, as it suggests that the company is not in a financially good position. On the other hand, if the company has more than a 20% of RoNW ratio then it can be a profitable company financially. As an investor or trader, you can easily invest your money in that company’s stocks without any hesitation.
There are also some companies that hold a RoNW ratio of more than 100%. The stocks of these companies are extremely profitable too.
High RoNW ratio holding companies
According to the screener.in, Shree Precoated Steels Ltd has a high RoNW also known as ROE. That is why in the following image I have highlighted the ROE ratio in green color to make it more prominent.
Here I have given another example of the very famous listed company Hathway Bhawani Cabletel & Datacom Ltd which has 398% of RoNW.
There are so many companies in the stock market which has a high RoWN ratio. The companies that hold more than 100% of RoNW. It is considered the best company to invest in as these companies are considered the financially strong ones.
Low RoNW ratio holding companies
Goenka Business & Finance Ltd is a company that holds a very very low RoNW ratio as you can see I have highlighted it in red color. It suggests that is not going to be a profitable company in the near future.
Here I have put another example of Bombay Burmah Trading Corporation Ltd which has a RoNW ratio of 6.98%. that number is not even close to the minimum ratio percentage.
It is important to look closely at these ratios before investing your money in their stocks. Because if you take shelter in a sinking ship you will never reach the land. Similarly, if you put your money in a low RoNW ratio company that will never bring you profit. That is why it is important to choose the right company by analyzing these ratios clearly.