Return on Net Worth (RONW) measures the portion of net income returned as a percentage of shareholder equity. Calculations can vary, but RONW is important to assess whether a company is making the best use of resources and identify unfavorable changes early on. It can also be used to assess progress within a given period.
Also known as a return on equity, Return on Net Worth (RONW) describes the portion of net income that is ultimately returned as a percentage of the equity owned by a company’s shareholders. This particular calculation makes it easier to understand how much profit the business generates from the investments provided by shareholders. In this sense, the RONW is important to measure if the company is making the best use of those resources, or if it is necessary to make changes that help increase the percentage of return that is generated as a result of the stockholders’ equity.
There are several different approaches or formulas used to determine the return on equity. A basic approach calls for dividing net income for a specified period by net worth as held during that same period. Another approach requires the use of an average of net worth over the period instead of actual net worth as of a particular date. Some companies also choose to omit preferred stock dividends from net income, while also subtracting preferred equity from shareholders’ equity during the period considered. The exact number of variables involved is often influenced by what the company wants to achieve with the calculation.
Determining the RONW can be a common element to close out a specific billing or revenue period. When this is the case, companies turn their attention to how net income and net worth hold up to the last day of that period. The percentage that results from the calculation can be compared to prior periods, providing the business with a snapshot of whether the business is advancing, holding steady, or beginning to lose ground in terms of revenue generation. From this perspective, calculating the return on equity can help identify an unfavorable change early on, isolate the reasons for the change, and take steps to correct the problem before lasting damage is done to the operation.
It is even possible to use the basic return on equity formula to assess progress within a given period. For example, the business may determine what is known as an initial RONW at the beginning of a business quarter, calculate another percentage in the middle of the period, and then make a third calculation once the quarter closes. This approach allows you to address issues that affect revenue generation, as well as expenses that reduce the amount of net income generated throughout the period. As a result, the potential to end the quarter with a more desirable return on equity increases, a state of affairs that is good for both the company and its investors.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
