Net operating assets

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Net operating assets (NOA) are a business's operating
assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...
minus its operating
liabilities Liability may refer to: Law * Legal liability, in both civil and criminal law ** Public liability, part of the law of tort which focuses on civil wrongs ** Product liability, the area of law in which manufacturers, distributors, suppliers, re ...
. NOA is calculated by reformatting the balance sheet so that operating activities are separated from financing activities. This is done so that the operating performance of the business can be isolated and valued independently of the financing performance. Management is usually not responsible for creating value through financing activities unless the company is in the finance industry, therefore reformatting the balance sheet allows investors to value just the operating activities and hence get a more accurate valuation of the company. One school of thought is that there is no such security as an operating liability. All liabilities are a form of invested capital, and are discretionary, so the concept of net operating assets has no basis because operating assets are not discretionary. NOA are mathematically equivalent to the invested capital (IC), which represents the funds invested into the company that demand a financial return in the form of
dividends A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-inv ...
( equity) or interests (other short and long-term debts, excluding operating liabilities such as
Accounts Payable Accounts payable (AP) is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. An accounts payabl ...
).

# Calculation - ''Operating Approach''

To calculate NOA or the Invested capital, the balance sheet must be reformatted to separate operating activities from financing activities. Operating activities are anything that involves the day-to-day running of the business such as accounts receivable, inventory, etc.; and financing activities are any accounts that are "interest-bearing" or have financial characteristics and are not related to the regular operations such as debt and equity investments. Operating assets The basic equation is: $\mbox = \mbox - \mbox - \mbox$ A distinction should be made between ''liquidity/buffer cash'', which is required for the day-to-day operations, and ''excess cash'', which the company does not need for its operations. This distinction is usually not visible on financial statements, thus needs to be estimated when calculating the NOA. Financial assets are excluded, as they could be sold without disrupting the company's operations. However, controlling stakes and investments in affiliates on which the company exercises a significant influence (typically over 20% ownership) are considered as operating assets due to their strategic importance in the operation of the company. Operating liabilities The basic equation is:$\mbox = \mbox + \mbox + \mbox + \mbox + \mbox$Note that equity is not included in liabilities. Taxes on financing profit should be excluded.

# Calculation - ''Financing Approach''

Alternatively, the invested capital (and thus the NOA) can be calculating as the net amount of interest-bearing debts:$\mbox = \mbox + \mbox - \mbox - \mbox$ Operating liabilities, such as Accounts Payable, are excluded as they do not normally generate interest expenses.

# Application

Calculating NOA is necessary for applying the ''Discounted Abnormal Operating Earnings valuation model''. DAOE is one of the most widely accepted valuation models because it is considered the least sensitive to forecast errors. NOA can also be used in the calculation of Free cash flow (FCF) and therefore the
Discounted cash flow The discounted cash flow (DCF) analysis is a method in finance of valuing a security, project, company, or asset using the concepts of the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate devel ...
model. However it is not necessary to calculate FCF. * $\mathrm = \frac + -$ * $\mathrm = -$ * $\mathrm = \frac - \left\{\mbox\left\{BVD$ Invested capital is used in several important measurements of financial performance, including return on invested capital, economic value added, and free cash flow.

# References

* Brealey, Myers, and Allen. ''
Principles of Corporate Finance ''Principles of Corporate Finance'' is a reference work on the corporate finance theory edited by Richard Brealey, Stewart Myers, Franklin Allen, and Alex Edmans. The book is one of the leading texts that describes the theory and practice of c ...
'', 8th edition (McGraw-Hill/Irwin, 2005). * G. Bennett Stewart III. ''The Quest for Value'' (HarperCollins, 1991).