Net Operating Assets
Encyclopedia
Net operating assets are a businesses operating assets minus its operating liabilities. 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. Financing activities do not create value 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.
In order to calculate NOA you must reformat the balance sheet in order 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. The reformatted balance sheet should look like this:
Balance sheet of XYZ, Ltd. as of ...
OPERATING ACTIVITIES :
Current assets
– Current liabilities
= Net current assets
+ Non-current assets
– Non-current liabilities
= NET OPERATING ASSETS (NOA)
FINANCING ACTIVITIES
Net financing obligations
Equity
(FCF) and therefore the Discounted cash flow
model. However it is not necessary in order to calculate FCF.
Calculation
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In order to calculate NOA you must reformat the balance sheet in order 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. The reformatted balance sheet should look like this:
Balance sheet of XYZ, Ltd. as of ...
OPERATING ACTIVITIES :
Current assets
Current asset
In accounting, a current asset is an asset on the balance sheet which can either be converted to cash or used to pay current liabilities within 12 months...
– Current liabilities
Current liability
In accounting, current liabilities are often understood as all liabilities of the business that are to be settled in cash within the fiscal year or the operating cycle of a given firm, whichever period is longer...
= Net current assets
+ Non-current assets
– Non-current liabilities
= NET OPERATING ASSETS (NOA)
FINANCING ACTIVITIES
Net financing obligations
Equity
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 to be the least sensitive to forecast errors. NOA can also be used in the calculation of Free cash flowFree cash flow
In corporate finance, free cash flow is cash flow available for distribution among all the securities holders of an organization. They include equity holders, debt holders, preferred stock holders, convertible security holders, and so on....
(FCF) and therefore the Discounted cash flow
Discounted cash flow
In finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money...
model. However it is not necessary in order to calculate FCF.
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