Efficiency is one of the primary factors in a company’s success. There are several metrics that provide valuable insights into a company’s operating efficiency. One of these includes the net operating assets. However, it is crucial to know about operating assets and liabilities first.
What are Operating Assets and Liabilities?
Operating assets are any resources owned or controlled by a company used in daily operations. These assets play a significant role in helping companies generate revenues from their business activities. When companies acquire an operating asset, they use it to run ongoing operations. These assets may include non-current and current assets, for example, inventory, machinery, equipment, patents, licenses, etc.
Operating liabilities are similar to operating assets. These are liabilities that companies accrue as a result of their operations. Usually, these liabilities relate to expenses that companies bear due to their operations. For example, operating liabilities include accounts payables, unpaid utility expenses, accrued salaries, and wages, etc.
What are Net Operating Assets?
The term “net operating assets” (NOA) refers to operating assets after deducting operating liabilities. In other words, it is a company’s operating assets minus its operating liabilities. Calculating NOA requires companies to separate their operating assets and liabilities from their total assets and liabilities. This metric helps companies remove financial assets from their total assets for better comparisons.
Net operating assets represent the overall assets and liabilities that companies own from their operating activities. NOA allows companies to measure their operational efficiency. They can also compare it with their net operating profit for better insights into their operations. With NOA, companies can value their operating performance independently of financing performance.
What is the Net Operating Assets formula?
The formula for net operating assets is straightforward. From its definition, NOA is the residual operating assets after deducting operating liabilities. Therefore, the net operating assets formula is as follows.
Net Operating Assets = Operating Assets – Operating Liabilities
This approach to calculating net operating assets also requires companies to calculate their operating assets and liabilities. The formula for operating assets is as follows.
Operating Assets = Total Assets – Financial Assets – Excess Cash
Similarly, the formula for operating liabilities is as follows.
Operating Liabilities = Total Liabilities – Long-term Debt – Non-operational Liabilities
Alternatively, companies can also use a different net operating assets formula, which is as below.
Net Operating Assets = (Total Assets – Total Financial Assets) – (Total Liabilities – Total Financial Liabilities)
Example
A company, Mars Co., has operating assets of $30 million and operating liabilities of $20 million. Therefore, the company’s net operating assets will be as follows.
Net Operating Assets = Operating Assets – Operating Liabilities
Net Operating Assets = $30 million – $20 million
Net Operating Assets = $10 million
What is the importance of Net Operating Assets?
Net operating assets have several uses for companies. Primarily, it allows companies to calculate their net assets after removing all financial assets and liabilities. Companies can then compare it with their operating profits to get valuable insights into their operational efficiency. Net operating assets also help calculate other figures, including free cash flows, discounted operating earnings, etc.
Net operating assets allows comparisons between various companies. The metric helps investors and stakeholders measure a company’s operating performance against others. In short, net operating assets help companies determine the relationship between operating assets, liabilities, and income.
Conclusion
Net operating assets refers to a company’s operating assets minus its operating liabilities. It represents the overall assets and liabilities that companies own from their operations. There are several formulas to calculate NOA. Net operating assets can help companies measure operating efficiency and make better comparisons.
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