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# Not Sensible Examine Roe Without Operating Non Operating Finance Essay

As an investor, it is always better to examine RNOA in a deeper manner by placing further importance on the two components which are margin and turnover. RNOA = Net Operating Profit After Taxes / Average Net Operating Assets Which can be re-written as: RNOA = (Net Operating Profit Margin / Sales)A  X (Sales / Net Operating Asset Turnover) Therefore: RNOA = Net Operating Profit Margin (NOPM)A  XA  Net Operating Asset Turnover (NOAT) Example: (Numbers assumed) Consider a big retail company as ‘X’ Suppose we originally calculate X’s RNOA = NOPAT/Average NOA = \$15,572/\$109,894= 14.17% Say Net Operating Profit Margin (NOPM)= NOPAT/Revenue =\$15,572/\$401,196 = 3.88 % Here the NOPM seems to be small for a big retail player as it implies that for every dollar sale , X only earns 3.8 cents as the operating profit after tax. However, the margin alone does not make sense without considering the turnover figures. Therefore lets consider: Net Operating Asset Turnover (NOAT) = Revenue/ Average NOA=\$401,196/\$109,894 = 3.65 Now, multiplying (NOPM) x (NOAT) = 3.88 x 3.65 = 14.17 % (The RNOA) Therefore a high margin firm does not ensure good returns for but it depends on the achieved turnover given the level of margin. Suppose the ROE for X is 19.87 % The operating returns for X =RNOA / ROE = 14.17/19.87 = 71.3% which is a very healthy figure. By calculating firm’s RNOA, we can seperate the portion of ROE arising due to operations of the business. ROE= Operating Return + Non operating Return. Investors and the management running the company should focus on the operating portion of return, which is Operating Return (RNOA) = Net Operating Profit After Taxes (NOPAT) / Average NOA Mostly companies break their operating results on their financials because management is judged based on the firms operating results. Also the debt to equity ratio should probably be monitored by investors. While analyzing a company’s statement of cash flows, you notice that the cash balance decreased over a period. Explain and discuss why this is this is not necessarily bad for the company? (3 Points)

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“Not Sensible Examine Roe Without Operating Non Operating Finance Essay”

## Ans:

Profit or loss indicates the results for a particular year or period of business. An Increase or Decrease in cash is liquidity during a period. Increase in cash always does not mean profit, it is only indicative of the fact that liquidity in shape of cash increased in comparison to cash balance as on the start of period/year. Therefore Profit/Loss and Increase/Decrease in cash are two different things in respect of a financial statement. Increase in assets decreases cash balance. Decrease in assets increases cash balance. Therefore the decrease in the cash balance may be because the company is acquiring more assets and possibly expanding its business, which is obviously not bad for the company , in fact the company seems to be growing.

## DuPont Formula:

Further breakdown gives: ROE Limitation: The DuPont formula is flawed in itsA inability to separate the decisions regarding both operating and financing changes RNOA, successfully separates financing and operating decisions and measures their effectiveness. RNOA = Operating Income (After Tax) / Net Operating Assets (NOA) Therfore by isolating the NOA, correct conclusions can be drawn from the ratio analysis, thus repairing the flaw in the DuPont model. Isolating the components also means that changing debt levels do not change operating assets (OA), the profit before interest expense, and the RNOA. ROE = RNOA + (FLEV X Spread) A A A A A A A A A A A  OR A A A A A A A A A  = Return From Operating Activities + Return From Non-Operating Activities (Financing)

## Effect of FLEV on ROE

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Not Sensible Examine Roe Without Operating Non Operating Finance Essay. (2017, Jun 26). Retrieved February 5, 2023 , from
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