# Its 2516 roe provides some evidence that this

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this manner will reap future rewards for its shareholders. Its 25.16% ROE provides some evidence that this strategy is not necessarily misguided. Assets Liabilities Nonoperating Return-With Debt FinanCingand Nonoperating Assets Most companies report both debt and investments on their balance sheets. If that debt markedly exceeds the invest- ment balance, their ROE will look more like our first example (with debt only). Instead, if investments predomi- nate, their ROE will look more like Intel's. It is important to remember that both the average NNO (and FLEV) and NNE can be either positive (debt) or negative (investments), and it is not always the case that ROE exceeds RNOA. We now compute nonoperating return for Target, a company with both debt and investments. Nonoperating Return for Target In Exhibit 3A.l, we define net nonoperating expense (NNE) as NOPAT - Net income. For Target, we can compute NNE as NOPAT of \$3,397 million less net income of \$2,920 million, which yields \$477 million. More generally, NNE can include a number of nonoperating items such as interest expense, interest revenue, dividend income, investment gains and losses, income (loss) on discontinued operations and noncontrolling interest (if any); all net of tax. (Recall that the simple illustration at the beginning of this appendix ignored taxes, which meant NNE was equal to the \$35 interest paid.) To compute operating return (RNOA) we divided NOPAT from the income statement, by NOA from the bal- ance sheet. Similarly, to compute the net nonoperating expense percent (NNEP), we divide NNE from the income statement by net nonoperating obligations from the balance sheet (NNO). Exhibit 3A.2 shows how a balance sheet can be reorganized into operating and nonoperating items. --_. -- _. -~ - ---~ EXHIBIT 3A.2 Simplified Balance Sheet Net operating assets (NOA) ....... .... (assets - liabilities) Current Operating Assets + Long-Term Operating Assets = Total Operating Assets Current Operating Liabilities + Long-Term Operating Liabilities = Total Operating Liabilities Net nonoperating obligations (NNO) . (liabilities - assets) Current Nonoperating Assets + Long-Term Nonoperating Assets Current Nonoperating Liabilities + Long-Term Nonoperating Liabilities + Noncontrolling Interest (if any) = Total Nonoperating Assets = Total Nonoperating Liabilities Equity Stockholders' Equity (excluding any noncontrolling interest) Equity (NOA - NNO) Total Assets Total Liabilities and Equity Net nonoperating obligations are total nonoperating liabilities, including any noncontrolling interest, less total nonoperating assets. The accounting equation stipulates that Assets = Liabilities + Equity, so we can adjust it to yield the following key identity: Net operating assets (NOA) = Net nonoperating obligations (NNO) + Stockholders' equity ....

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Module 3 I Profitability Analysis and Interpretation 3-24 Target, we compute NNO as follows: millions) 2011 2010 \$ 119 \$ 796 900 11,653 10,643 3,954 4,475 15,726 16,814 1,712 2,200 0 0 1,712 2,200 \$14,014 \$14,614 Nonoperating liabilities Unsecured debt and other borrowings .
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