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Components of RNOA - Profit Margin and Asset Turnover

# Components of RNOA - Profit Margin and Asset Turnover

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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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05/11/2014

pdf

text

original

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