Net operating assets are a business's 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. 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. NOA are mathematically equivalent to the invested capital, which represents the funds invested into the company that demand a financial return in the form of dividends or interests.
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: 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 are considered as operating assets due to their strategic importance in the operation of the company. Operating liabilities The basic equation is:Note that equity is not included in liabilities. Taxes on financing profit should be excluded.
Calculation - ''Financing Approach''
Alternatively, the invested capital can be calculating as the netamount of interest-bearing debts:Operating liabilities, such as Accounts Payable, are excluded as they do not normally generate interestexpenses.
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 and therefore the Discounted cash flow model. However it is not necessary to calculate FCF.
