Return on Net Worth

Finance

Quick Definition

Return on Net Worth (RONW) is a profitability ratio that measures how effectively a company generates profit from its shareholders’ equity (net worth).

Detailed Explanation

RONW shows how efficiently a company uses the funds invested by its shareholders to generate profits. It is also commonly referred to as Return on Equity (ROE).

A higher RONW indicates better management efficiency and profitability, making it an important metric for investors.

Formula

👉 RONW = (Net Profit ÷ Shareholders’ Equity) × 100

Where:

  • Net Profit: Profit after tax (PAT)
  • Shareholders’ Equity: Share capital + reserves

Why RONW Matters

  • Measures return to shareholders
  • Helps compare company performance
  • Indicates financial efficiency

Interpretation

  • High RONW: Efficient use of equity
  • Low RONW: Poor profitability or excess equity

RONW vs ROCE

[Image comparing RONW vs ROCE focusing on equity vs total capital]
  • RONW: Focuses on shareholders’ funds
  • ROCE: Considers total capital (debt + equity)

Example

"If a company earns ₹1 lakh profit with ₹5 lakh equity: 👉 RONW = 20%"

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