Noat revenues 67390 227 average noa 29501 299612 l02

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NOAT = Revenues = $67,390 = 2.27 Average NOA ($29,501 + $29,961)/2 L02 Disaggregate operating return (RNOA) into components of profitability and asset turnover.
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3-13 Module 3 I Profitability Analysis and Interpretation This result means that for each dollar of net operating assets, Target realizes $2.27 in sales. As a reference, the median for publicly traded companies over the past decade is about $1.40. NOAT can be increased by either increasing sales for a given level of investment in operat- ing assets, or by reducing the amount of operating assets necessary to generate a dollar of sales, or both. Reducing operating working capital (current operating assets less current operating liabilities) is usually easier than reducing long-term net operating assets. For example, companies can implement strategies to collect their receivables faster, reduce their inventories, and delay payments to their suppliers. All of these actions reduce operating working capital and, thereby, increase NOAT. These strategies must be managed, however, so as not to negatively impact sales or supplier relations. Working capital management is an important part of managing the company effectively. It is usually more difficult to reduce the level of long-term net operating assets. The level of PPE required by the company is determined more by the nature of the company's products or services than by management action. For example, telecommunications companies require more capital investment than do retail stores. Still, there are several actions that managers can take to reduce capital investment. Some companies pursue novel approaches, such as corporate alliances, outsourcing, and use of special purpose entities; we discuss some ofthese approaches in Module 10. BUSINESS INSIGHT Target's NOAT The following chart shows Tar- get's net operating asset turn- over from 2009 to 2011. Target's operating asset turnover has increased from 2.11 to 2.27 during this period, and is great- er than the median for publicly traded companies. 3.0% 2.8% 2.6% 2.4% 2.2% 2.0% 1.8% 1.6% 1.4% 1.2% 1.0% ~ I .NOAT I r; TY'e I---- r:;= ,OJ. '--- I--- t;::= I---- ..• / I--- r;~o '----0 / 2009 2010 2011 f;jl'i" "" ~,~ r" ,,~'''~ "'" ~ ~''''''' W> "" ;~".:ANAI:-V8.IS DECISION" You are analyzing the performance of your company. Your analysis of RNOA reveals the follow- ing (industry benchmarks in parentheses): RNOA is 16% (10%), NOPM is 18% (17%), and NOAT is 0.89 (0.59). What interpretations do you draw that are useful for managing your company? [Answer, p. 3-29] Trade-Off between Margin and Turnover Operating profit margin and turnover of net operating assets are largely affected by a company's business model. This is an important concept. Specifically, an infinite number of combinations of net operating profit margin and net operating asset turnover will yield a given RNOA. This rela- tion is depicted in Exhibit 3.4 (where the curved line reflects the median RNOA for all publicly traded companies during the most recent decade).
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