The profitability component of rnoa measures net

Info icon This preview shows pages 2–4. Sign up to view the full content.

View Full Document Right Arrow Icon
The profitability component of RNOA measures net operating profit after tax for each sales dollar (NOPAT/Sales), and is the net operating profit margin (NOPM). Target's NOPM has increased from 4.25% to 5.04% in the past three years. Asset productivity, the second component of RNOA, is reflected in net operating asset turnover (NOAT). NOAT is mea- as sales divided by average net operating assets-it captures the notion of how many sales dollars are generated by dollar of invested assets. Target has increased its NOAT from 2.11 to 2.27 in the past three years. Increasing the turnover - large asset bases is difficult, and NOAT measures tend to fluctuate in a narrow band. When companies are able to make a ---:eaningful improvement in NOAT, however, it usually has a large impact on RNOA. RNOA is an important metric in assessing the performance of company management. We can use the RNOA components, PM and NOAT, to assess how effectively and efficiently management uses the company's operating assets to produce a m. The difference between ROE and RNOA is important for our analysis. Specifically, ROE consists of a return on operating - .' ities (RNOA) plus a return on nonoperating activities, where the latter reflects how well the company uses borrowed funds. (continued on next page) - ----~-"" ..• __ .. - .. "'..., TARGET 3-2
Image of page 2

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
(continued from previous page) Companies can increase ROE by borrowing money and effectively using those borrowed funds. However, debt can increase the company's risk-where severe consequences can result if debt is not repaid when due. This is why Warren Buffett focuses on "businesses earning good returns on equity while employing little or no debt." For those companies that do employ debt, our analysis seeks to evaluate their ability to repay the amounts owed when due. Over the years, analysts, creditors and others have developed hundreds of ratios to measure specific aspects of financial performance. Most of these seek answers to the root question: Can the company achieve a high return on its invested capital and, if so, is that return sustainable? Sources: Target 10-K, 2011; Berkshire Hathaway 1O-K, 2010; The Waif Street Journal, January 2011. OS: :DO G>C »c:: Zr N m » -I o Z 3-3 Nonop~rating I;tf;!turn iii Operating Revenues and Expenses !III Tax on Operating Profit III Operating Assets and Liabilities !III Disaggregating RNOA into Margin and Turnover III Measuring ROE III Disaggregating ROE into Operating and Nonoperating Returns Ii'II Distinguishing Operating from Nonoperating Activities II!!! Measuring Nonoperating Return III Leveraging Debt to Increase ROE !III Risks of Debt Financing !III Debt Covenants and Solvency III Limitations of Ratio Analysis A key aspect of any analysis is identifying the business activities that drive company success. We pursue an answer to the question: Is the company earning an acceptable rate of return on its invested capital? We also want to know the extent to which the company's return on invested capi- tal results from its operating versus its nonoperating activities. The distinction between returns from operating and nonoperating activities is important and plays a key role in our analysis.
Image of page 3
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern