Operating assets are the things a business uses to make money, such as inventory, patents, equipment and accounts receivable. A company's net operating assets (NOA) is the value of its operating assets less the company's operating liabilities. It's a useful measure of how well a business uses its assets to generate income.
Business Operating Assets
A company's operating assets may include inventory, prepaid expenses, accounts receivable, fixed assets such as buildings and equipment, and intellectual property. What these assets have in common is that they're all used in company operations to generate revenue. Non-operating assets include financial investments and old assets no longer used in operations.
To calculate net operating assets, take the company's total assets and subtract the value of cash, investments and total liabilities. Then, add in the total of the company's long-term debt. That's the NOA formula.
The ratio of total assets to operating assets shows how much of the business is actually generating revenue and how much is just sitting there. The ratio of operating assets to revenue measures how well the company uses its moneymaking assets. Numbers don't tell the whole story, though: A company that's expanding into new areas may have a poorer ratio as it taps its resources to penetrate the market.
Business Operating Liabilities
Operating liabilities are short-term debts resulting from the business's operations, such as accounts payable, income taxes and accrued liability. If you receive a $500 bill from a supplier, that adds $500 to accounts payable. If you haven't received a bill by the end of the accounting period, you write down $500 as accrued liability.
Non-operating liabilities are financial expenses such as interest-generating debts. These affect the overall financial health of the company, but they don't measure the costs and expenses of regular business operations.
The NOA Formula
To make an NOA calculation, take the company's assets and subtract non-operating assets such as securities and other investments. That gives you the operating assets. To calculate operating liabilities, subtract financial liabilities from total liabilities. Subtract operating liabilities from operating assets and you get net operating assets (NOA).
An alternative NOA formula is to take total assets, then subtract all liabilities and all financial assets. Add financial liabilities back in. Once again, the final result of the formula is net operating assets.
For example, suppose the ABC Computer Company has $1.5 million in assets including $.5 million in investments, and $300,000 in liabilities including $100,000 in financial liabilities. Subtracting $.5 million and $300,000 from the assets gives you $700,000. Add the $100,000 in financial liabilities and the company has $800,000 in net operating assets.
Net Operating Assets
Like operating assets, net operating assets are useful for measuring a business's efficiency. You do this by comparing it with net operating profit, which is revenue minus expenses, excluding tax and interest expense. You use the result to judge how well a business uses its assets to generate revenue.
The advantage of this approach is that both NOA and net operating profit focus on business operations and exclude investments. A company's profitable investments can make it look successful even if it doesn't generate much revenue from operations. Interest payments can make operations look less successful. Looking at operating profit and operating revenue can give you a clearer picture.
By calculating net operating profit as a percentage of NOA, you can also compare different businesses of different sizes more objectively. If two businesses in the same industry have the same percentage, they may be equally efficient even if one is twice the size of the other.
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