Net operating assets (NOA) are often used to calculate the value of a company. A company’s net operating assets can be calculated by subtracting the company’s operating liabilities from its operating assets. Operating assets include items such as inventory, equipment, fixed assets, and accounts receivable. Operating liabilities are debts and other expenses like accounts payable, accrued expenses, and interest payments, for example.
There are plenty of ways to examine a firm’s business operations. You can take a look at its financial statements and find total revenue, total sales, net revenue, or net income, for instance. Calculating net operating assets is yet another angle. Using this calculation, you can determine if a company is maximizing its profitability from an operating standpoint as opposed to sales figures and other methods.
Today we’ll dig into exactly what operating assets and liabilities are and how to use those numbers to calculate net operating assets. First, let’s take a quick look at total assets and liabilities, how to calculate a company’s operating assets, and also how to calculate operating liabilities.
What are net operating assets?
A company’s net operating assets (NOA), unlike total assets, are specific to the value of assets as directly related to its core operations. It helps to create a more accurate valuation of a company based only on its operating activities, as separate from its financing activities.
The importance of this is so that a business can be valued independently of its financing performance. For example, if a company in the same industry is twice the size of another as far as generating revenue, it might be difficult to compare the two.
So you take out the financial aspects and focus only on the business operations, which allows you to gain a clearer picture of the efficiency of its operations. In that way, you can compare one company to another without being concerned with the total value of the business. In order to do that, it’s important to understand the difference between an operating asset versus an operating liability, and a financial asset versus a financial liability.
That being said, if you’re a small business struggling to compete with a larger company’s revenue stream, there are steps you can take to combat this difference. Using a small business loan, for example, you can expand your production level and entire business model.
Assets and liabilities
You probably know that your personal assets are things like your car and house, while your liabilities are your credit card and student loan debt. But it’s important to be aware of what these same terms mean in relation to a company.
In a nutshell, a company’s total assets are what a business owns and liabilities are what a business owes. For the purposes of calculating net operating assets, we’ll break them down into operating liabilities and assets as well as financial assets and liabilities.
|Operating assets||Operating liabilities|
|Accounts receivable — incoming payments from customers||Accounts payable — outgoing payments to suppliers, etc.|
|Property, such as a factory to manufacture products||Accrued operating expenses — money owed for expenses incurred but not yet paid for|
|Tools, machinery, and other equipment used to run the business’s core operations||Day-to-day operating expenses|
|Financial assets||Financial liabilities|
|Excess cash||Long-term debt such as mortgages|
|Marketable securities — investments such as stocks and bonds, considered cash equivalents because they can easily be converted to cash||Other bank debts, such as lines of credit|
|Prepaid expenses — things paid for but not yet incurred, like prepaid insurance||Taxes|
Net operating assets formula
As previously mentioned, you can calculate the net operating assets by taking the operating assets and subtracting the operating liabilities. The formula looks like this:
You can calculate operating assets by subtracting non-operating, or financial, assets from total assets. Similarly, operating liabilities can be reached by subtracting financial liabilities (or non-operating liabilities) from total liabilities.
To put it another way, the net operating assets figure can be calculated by finding the difference between a business’s operating assets and liabilities after adjusting for financial activities.
This is because financial assets and liabilities don’t specifically generate revenue for a firm’s core operations. Therefore, they need to be deducted from the total assets and total liabilities to arrive at the amount of a firm’s operating assets.
In other words, a financial asset may generate revenue but it does not directly correspond to generating revenue from the core operations. So to truly analyze the net operating profit of a company, you need to know its net operating assets. The formula gets further broken down like this:
Examples of net operating assets
Let’s start with the simplest formula: NOA = Operating assets — Operating liabilities
XYZ Corp. has $1 million in operational assets (OA) and $250,000 in operating liabilities (OL), so its net operating assets are $750,000.
To take it further, we came to $1 million in operational assets by subtracting financial assets (FA) of $2 million from the company’s total assets (TA) of $3 million.
The figure of $250,00o was reached by starting with the firm’s total liabilities (TL) of $500,000 and deducting its financial liabilities (FL) of $250,000.
Continuing with the previous example, we can take the formula full circle. Remember that XYZ Corp. has $3 million in total assets, $2 million in financial assets, total liabilities of $500,000, and financial liabilities of $250,000.
- Net operating assets (NOA) are all assets directly related to a company’s operations.
- You calculate net operating assets by subtracting the net operating liabilities from its net assets.
- Net operational assets include accounts receivable, inventory, and equipment. Operational liabilities are accounts payable and accrued expenses, among others.
- A financial non-operating liability is something that does not generate income such as taxes, mortgages, and interest expenses. Financial non-operating assets are excess cash, marketable securities, and prepaid expenses.
- Looking at net operating assets is another way of seeing a company’s overall financial health through its operating performance.
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