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non operating/
Why are we even concerning our sales with RNOA WHY NOT USE ROA OR ROE.
*ROA) measures the profitability of the total assets owned by the company. In 2015, Intel
reported an impressive net income of $11 billion. What level of assets was used to generate this $11
billion? Intel’s average total assets was $97,483 million during 2015. By dividing net income by
average total assets during the year, we see that Intel’s ROA, the return on total assets, was
11.7%—for every dollar of assets held by Intel during 2015, the company earned just under 12 cents.
*The difference between ROE and ROA shows the effects of the company’s use of debt. Intel
has borrowed money and invested in assets that create a return. By borrowing at rates that are less
than the company’s ROA, Intel has substantially increased the shareholders’ investment from 11.7%
ROA to 19.5% ROE. However, debt can increase the company’s risk— where severe consequences can
result if debt is not repaid when due.
*A potentially more informative metric to use when assessing performance is return on net
operating assets (RNOA). RNOA focuses on the returns from the assets that a company uses
for operations, net of any operating liabilities. Compared to ROA, RNOA is a more precise
measure of the profitability from a company’s core operations because RNOA disregards ancillary,
or “nonoperating” activities. For Intel, RNOA measures the profitability of the design,
manufacturing, and selling of integrated digital technology platforms and excludes the return from
investments. In 2015, Intel’s RNOA was 22.9%, nearly double its ROA of 11.7%
profitability= earning
*earnings season?
annual earnings are going to start coming up probably a little early for companies.
for all S&P500 the earnings growth will be slower. (Higher earnings last year, but growth is slowing
down)
Difference between ROE and ROA? shows the effects of the company’s use of debts(borrowing).
Return on Equity (ROE)and Return on Assets (ROA)
*If a company can borrow? at an interest rate that is less than its ROA return on assets, then its ROE
will be higher than ROA.
*Max Segall- you can borrows as less than ROA will be greater invest in DG
Successfully employee called “Leverage” other people’s money.
*ROE = NET INCOME/ average stockholders’ equity= net income / average total
assets__(ROA)= average total assets/ average stockholders’ equity___(FINANCIAL
LEVERAGE)
*ROA is significantly higher = Earnings divided by assets the investment in real estate is higher
than the historical low interest rates that it charges.
EX: If you borrow 80% for a real estate investment that’s $100,000 asset,
When assessing performance? aside from gap (Earnings), theres something better. Is not earning
Q1 * RNOA Return on net operating assets
@RNOA = NOPAT divided by NOA*(NOPAT=Net operating profit after tax) *(NOA= Net Operating
Assets).
How is this different than ROA? It’s operating. It’s not all earnings. it’s just operating earnings.
It’s not all assets, it’s just net operating assets.
Theoretical reason*If you are going to value a business, you would look at what the future profit
and earnings. WHAT THE MUST important factor? would be ongoing profits from the actual
operations not from real estate sales
@Factual reason is that RNOA is a better predictor of future earnings. RNOA is more closely
related to the stock price than just ROE or ROA
How do you find the operating assets? it’s not the same as the Operating Assets on the gap
balance sheet, you figure the operating assets by NOPAT divided by (Operating assets minus
Operating Liabilities) Kind of like a return on equity. “Operating Equity” / if don’t item on the
balance sheet called Operating Equity
It attempts to take out the non operating
Q2*Operating assets assets related directly to operating activities and are NOT the same
as current assets.
Q(page 3-16 exhibit 3.5) LOOK FOR RULE NOT Operating assets
*Operating assets are those assets directly linked to operating activities, the company’s ongoing
(continuing) business operations. They typically include receivables; inventories; prepaid expenses;
property, plant, and equipment (PPE); and capitalized lease assets. Operating assets are those the
company needs to operate normally, and those assets can be purchased outright or leased. Leasing is
a way to acquire an asset for use without the upfront cash outlay.
Liabilities-
*NON operating liability is a liability on which interest is paid. ex Loans Payable, bonds payable,
Notes Payable (because they have to do with interest)
*Capitalized lease obligations is NON operating Because there’s an implicit interest payment (will
show up as an asset and not a liability)
Where do you find in financials Non operating profit? On income statement under gross margin
(page 3-21 exhibit 3.7)
Income from equity method investments is an Operating
When do you have to use this equity form of accounting on an investment? if a company
purchases the stock of another company (a lot- at least 20% but not more than 50%) then it is
considered to have a controlling interest. and they have to use “equity method “of investing. This is
considered a strategic investment Because the income from that investment is considered
operating . This is an exception.
Is the investment itself considered operating assets? YES
* When a company owns more than 50% of another’s common stock? they would consolidate
financial statements (means take literally the operating the asset, lability, operation of this other
company.
This is all before taxes
_________________________________________________________________
How to get figure after taxes? Apply the tax formula. 21% flat (Marginal tax rate)
We don’t have to use the formula the book says
WHAT THE after taxes amount Operating profit minus 21%
*What about state corporate tax rate? Depends on the state you are operating in. State tax is
deductible for federal tax purposes, how do you calculate the effective state rate?
*State corporate tax rate = state marginal rate * (1- federal marginal rate)
If state marginal rate it’s 8% then the rate would be 8% * (1-.21)
Q*operating cash flow has nothing to do with NOPAT ( LIKE operating ITS NOT)
We are looking at a gap earnings figure (accrual earnings) modifier
RNOA= NOPAT/ NOA = (NOPAT/Sales) THIS NOPM NET OPERTING PROFIT MARGIN * (sales/ NOA) THIS
NOAT NET OPERTING ASSET TURNOVER
* Net operating profit margin (NOPM) reveals how much operating profit the company earns from
each sales dollar.
* Net operating asset turnover (NOAT) measures the productivity of the company’s net operating
assets.
*How many cents of after tax operating profit? Dollar sale
The higher the operating margin (which is NOPAT/Sales) = the more profitable a company’s sales are
High and low margins
*High margin industries = pharmaceutical
*will tell you how capital intensive a company is? The lower the sales / NOA= the more intensive.
* would you rather have 1,000,000,000 in sales and $1 in equity or $1 of sales with
1,000,000,000 in equity? The first one Shows how well a company is managing its assets
How do you increase operating margin? Move from low margin products to high margin products
like the auto industry. advertise and increase marketing (only works if you get more sales)
How to improve turnover NOAT
Is inventory an operating asset? Yes
If a company is using a traditional inventory system, they use a make to inventory. Constant would
come in and change it to JIT Just In Time- means you don’t have much inventory. NOA would be
low and you become more profitable. Stock price goes up so RNOA go up
Reduce NOA, reduce inventory, JIT Justin time
Equipment, machines, property, plant . Qcan you reduce in this case? Outsource. NIKE doesn’t
manufacture any of its shoes. it’s just a design and marketing company. PP&E @When you outsource,
you’re not manufacturing so it’s cheaper but your sales are still high. you become a service industry
@Extra credit. Corporate accounting you’re doing accounting. At private place you’re doing
everything- sales, hiring
how do we use RNOA. It’s historical. It’s already occurred. It was from the last year…if it was working
well, you want to predict the future, it’s ok, but not a great method to use. might be better though than
companies who hire drones to check out crops and see status to predict earnings.
SCC hacking in 2017. (early) Access to earnings reports, and made 4.1 mil$
Value investing- people have made money, but not the most.
Data analytic measures may be the way to go?
3-28
Stock returns are positively associated it earnings. But RNOA components are more strongly
associated w stock return and future profitability than earnings ROA and ROE
RNOA is better in this case
When companies report higher than expected earnings, stock prices rise
Article:
Value stocks aren’t what they used to be-WallStreet Journal
Price to Book = Market to Book ratio should be sent to the graveyard
Low market to book- if you could buy skank of america back in ’09 at .6. less than book value. This is
saying it’s not as good bc they have lagged behind growth stocks for at least a decade.
Buy the wild companies like Tesla, Amazon,
Investing in growth stocks = high PE (high Price divided by earnings (earnings either NOPAT or
growth)) are high market to book
Tesla- no earnings. negative if any. growth stock have driven the bull market. Spotify, Facebook, Tesla,
Twitter
contributed capital is an offended category, problem w BV is that it includes CCap which is the BV of
the stock issues and outstanding. Retained earnings
Value investing has done poorly compared to growth investing, theres increasing intangible assets that
companies have more and more of, not PPE, if you ignore the contributed cap but focus on retained
earnings, MV to RetEarning per share maintains an effective indicator__________
market to contained earnings is a component of equity
BV is equity of BS. now they re saying don’t include all, get rid of ret earnings
MARKET TO RETAINED EARNINGS for stock screens
______
Review
——-
ROE and ROA and interest. If you can borrow at a lower int rate
RNOA is important. why it’s used. what are different components- NOPM and NOAT
Income from equity
Be able to tell if it’s operating or non operating. Rules of thumb to distinguish between the two
Margin
Turnover
how to increase either component
focus on higher profit margin products like auto companies. shifting from small unprofitable to larger
prof
socialist security
extra credit
Turnover
outsource
JIT
Article