Net operating assets

Net operating assets are those assets of a business directly related to its operations, minus all liabilities directly related to its operations. Stated differently, net operating assets are:

+ The total assets of a company
-  All liabilities
-  All financial assets
+ All financial liabilities
= Net operating assets 

This second definition shows that all finance-related items are to be extracted from assets and liabilities. A financial asset is one that generates interest income, while a financial liability generates interest expense. Financial assets include cash and marketable securities, while financial liabilities usually refer to debt and leases. Conversely, operating assets include accounts receivable, inventory, and fixed assets; operating liabilities include accounts payable and accrued liabilities.

For example, ABC International has $5,000,000 of total assets and $2,000,000 of total liabilities, which results in net assets of $3,000,000. ABC also has $150,000 of cash and marketable securities, which we subtract from the net assets figure, and $350,000 of debt, which we add back. The result is $3,200,000 of net operating assets.

The net operating assets figure is useful for comparison to the net operating profit of a business. This relationship shows the income generated from operations, as a percentage of the net assets used to create that profit. Conversely, the measurement strips out all earnings related to financial activities, so that returns based on leverage are ignored. In short, the net operating assets concept is intended to reveal the relationship between core earnings and core net assets, ignoring all financial engineering. This is an excellent basis of comparison when examining the financial structures of the businesses in an industry.

Related Courses

The Balance Sheet
The Interpretation of Financial Statements