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Components of RNOA - Profit Margin and Asset Turnover

Components of RNOA - Profit Margin and Asset Turnover

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Published by Carneades
Introduction to the components of return on net operating assets (RNOA): net operating profit margin and net operating asset turnover. Walmart's fy 2009 financial results are used to illustrate the dual components of operating return.
Introduction to the components of return on net operating assets (RNOA): net operating profit margin and net operating asset turnover. Walmart's fy 2009 financial results are used to illustrate the dual components of operating return.

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Published by: Carneades on Dec 02, 2009
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05/11/2014

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http://TheValueatRisk.blogspot.com
 
December
 
1,
 
2009
 
Components
 
of 
 
RNOA:
 
Profit
 
Margin
 
and
 
Asset
 
Turnover
 
Previously,
 
I
 
touched
 
on
 
the
 
importance
 
of 
 
Return
 
on
 
Net
 
Operating
 
Assets
 
(RNOA),
 
specifically
 
with
 
respect
 
to
 
my
 
view
 
that
 
it's
 
foolish
 
to
 
examine
 
a
 
firm's
 
ROE
 
without
 
an
 
idea
 
as
 
to
 
the
 
relative
 
contributions
 
of 
 
operating
 
and
 
nonoperating
 
returns.
 
I'd
 
like
 
to
 
examine
 
RNOA
 
a
 
bit
 
further,
 
and
 
place
 
some
 
emphasis
 
on
 
it's
 
dual
 
components
 
of 
 
margin
 
and
 
turnover.
 
Just
 
to
 
refresh,
 
the
 
original
 
formula
 
for
 
Operating
 
Return
 
is:
 
RNOA
 
=
 
Net
 
Operating
 
Profit
 
After
 
Taxes
 
÷
 
Average
 
Net
 
Operating
 
Assets
 
In
 
order
 
to
 
illustrate
 
the
 
margin
 
and
 
turnover
 
components,
 
I'll
 
create
 
a
 
new,
 
equivalent
 
equation:
 
RNOA
 
=
 
(Net
 
Operating
 
Profit
 
Margin
 
÷
 
Sales)
 
X
 
(Sales
 
÷
 
Net
 
Operating
 
Asset
 
Turnover)
 
Therefore:
 
 
http://TheValueatRisk.blogspot.com
 
December
 
1,
 
2009
 
RNOA
 
=
 
Net
 
Operating
 
Profit
 
Margin
 
(NOPM)
 
X
 
Net
 
Operating
 
Asset
 
Turnover
 
(NOAT)
 
Truthfully,
 
I
 
don't
 
blame
 
you
 
if 
 
this
 
still
 
doesn't
 
make
 
a
 
whole
 
lot
 
of 
 
sense.
 
So,
 
let's
 
look
 
at
 
this
 
using
 
some
 
real
 
numbers
 
from
 
the
 
largest
 
employer
 
in
 
the
 
world/retail
 
titan..WalMart
 
(WMT).
 
Above
 
I've
 
included
 
every
 
part
 
of 
 
an
 
equation
 
necessary
 
to
 
understand
 
RNOA's
 
components
 
of 
 
NOPM
 
and
 
NOAT.
 
Keep
 
in
 
mind
 
that
 
WalMart's
 
RNOA
 
was
 
originally
 
calculated
 
using
 
NOPAT/RNOA,
 
or
 
$15,637/$109,987
 
to
 
yield
 
14.22%.
 
To
 
calculate
 
Net
 
Operating
 
Profit
 
Margin
 
(NOPM)
 
I
 
took
 
NOPAT
 
of 
 
$15,637
 
and
 
divided
 
it
 
by
 
2009
 
revenue
 
of 
 
$401,244.
 
The
 
resulting
 
3.9%
 
seems
 
rather
 
feeble
 
for
 
such
 
a
 
monster
 
like
 
WalMart;
 
it
 
means
 
that
 
for
 
every
 
dollar
 
of 
 
sales
 
revenue,
 
WalMart
 
is
 
only
 
earning
 
3.9
 
cents
 
of 
 
after
 
tax
 
operating
 
profit.
 
Remember
 
though
 
that
 
the
 
margin
 
is
 
somewhat
 
useless
 
in
 
the
 
absence
 
of 
 
turnover
 
figures.
 
To
 
calculate
 
Net
 
Operating
 
Asset
 
Turnover
 
(NOAT),
 
I
 
took
 
2009
 
revenue
 
of 
 
$401,244
 
(millions
 
by
 
the
 
way,
 
crazy
 
right)
 
and
 
divided
 
it
 
by
 
Average
 
Net
 
Operating
 
Assets
 
of 
 
$109,987.
 
The
 
resulting
 
NOAT
 
is
 
3.65.
 
Now
 
multiply
 
3.9
 
(NOPM)
 
by
 
3.65
 
(NOAT);
 
the
 
result
 
should
 
look
 
familiar
14.2%.
 
Walmart's
 
figures
 
highlight
 
an
 
important
 
concerning
 
the
 
relationship
 
between
 
margins
 
and
 
asset
 
turnover.
 
A
 
high
 
margin
 
firm
 
won't
 
necessarily
 
earn
 
healthy
 
returns
 
for
 
shareholders;
 
it
 
all
 
depends
 
on
 
the
 
turnover
 
they
 
are
 
able
 
to
 
achieve
 
given
 
that
 
level
 
of 
 
margin.
 
I
 
included
 
WalMart's
 
20.63%
 
ROE
 
 just
 
to
 
illustrate
 
that
 
the
 
company
 
is
 
earning
 
a
 
very
 
healthy
 
operating
 
return
 
component
 
of 
 
69%
 
(14.22RNOA
 
/
 
20.63ROE).
 
Interestingly,
 
the
 
company
 
doesn't
 
highlight
 
this
 
ratio
 
in
 
its
 
financial
 
presentations.
 
Rather,
 
they
 
use
 
a
 
modified
 
return
 
on
 

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