To disaggregate nopm we examine the gross profit on

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To disaggregate NOPM, we examine the gross profit on products sold and the individual nse accounts that affect operating profit as a percentage of sales (such as Gross profit/Sales SG&A/Sales). These margin ratios aid comparisons across companies of differing sizes and s different time periods for the same company. We further discuss profit margin disaggrega- in other modules that focus on operating results. To disaggregate NOAT, we examine the individual balance sheet accounts that comprise A and compare them to the related income statement activity. Specifically, we compute :::ounts receivable turnover (ART), inventory turnover (INVT), property, plant and equipment ver (PPET), as well as turnovers for liability accounts such as accounts payable (APT). ysts and creditors often compute the net operating working capital turnover (NOWCT) to s a company's working capital management compared to its competitors and recent trends. ecall that operating working capital is calculated as current operating assets less current operat- g Iiabilities.) These turnover rates are further discussed in other modules that focus on operating ts and liabilities. Exhibit 3.5 provides a broad overview of ratios commonly used for compo- t disaggregation and analysis. ~ ROE Disaggregation ROE = Net income/Average equity _·_··1_·· _._ ..... ,. II ···1__···_· --J . Operating return + Nonoperating return RNOA = NOPAT/Average NOA x ART = Sales/Average Accounts Receivable INVT = Cost of Goods Sold/Average Inventory LTOAT = Sales/Average Long-Term Operating Assets APT = Cost of Goods Sold/Average Accounts Payable NOWCT = Sales/Average Net Operating Working Capital
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3-17 Module 3 I Profitability Analysis and Interpretation L03 Explain nonoperating return and compute it from return on equity and the operating return. NONOPERATING RETURN This section discusses a company's nonoperating return. In it's simplest form, the return on non- operating activities measures the extent to which a company is using debt to increase its return on equity. Equity Only Financing The following example provides the intuition for nonoperating return. Assume that a company has $1,000 in net operating assets for the current year in which it earns a 20% RNOA. It finances those assets entirely with equity investment (no debt). To simplify this example, we assume that taxes are 0%; later, we explain the impact of taxes. Its ROE is computed as follows: ROE = Operating return + Nonoperating return = 20% + 0% = 20% Equity and Debt Financing Next, assume that this company borrows $500 at 7% interest and uses those funds to acquire addi- tional operating assets yielding the same 20% operating return as above. Its net operating assets for the year now total $1,500, and its profit is $265, computed as follows: Profit from assets financed with equity ($1,000 x 20%) .
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