Return on Invested Capital and Profitability Analysis

I need help with a Accounting question. All explanations and answers will be used to help me learn.

When calculating return on net operating assets, analysts sometimes make adjustments to the net operating asset base used in the denominator of the ratio. Three possible adjustments are listed below. Explain what these adjustments are, and discuss the merits of these adjustments.

  1. Non-operating asset adjustment
  2. Intangible asset adjustment
  3. Accumulated depreciation adjustment

Just do response each posted # 1 to 3 down below only.

Posted 1

Non operating assets like investment in marketable securities and excess cash are deducted from capital. They are not considered to be a part of company’s core operations. The non operating assets could be unused land, spare equipment, and investment securities. The income a company earns from non-operating assets will be calculated under the non operating income for a company.

Intangible asset adjustments deducts intangible assets from Investment capital. The examples of intangible asset are trade marks, customer lists, motion pictures and franchise agreements. Under the GAAP guidelines, intangible assets are periodically reviewed for impairment and written down if necessary. The intangible assets also represents valid investments by the company. The management team is responsible for making they there is return on all investments.

The accumulated depreciation adjustments adds the depreciable assets to the balance sheet. There are no adjustments to the net income for depreciation expense. Even there are no adjustments, the return on investment (ROI) will still go up as the assets get older. The main reason for that is the assets are in good working conditions. However, the aging equipment may require to add additional cost which will impact the total earnings.

Posted 2

When calculating RNOA (return on net operating assets), the denominator of the formula is average NOA (net operating assets). Non-operating assets are assets that are not considered necessary to conduct the company’s business or daily operations. Determining which assets are non-operating assets can sometimes be left up to interpretation by analysts and investors. For example, equity investments may be left out of NOA because they are considered nonstrategic. Other investments considered to be strategic are included in NOA. Intangible assets such as goodwill are sometimes removed from NOA. As Kenton (2019) notes, goodwill “is often simply derived from an acquisition, rather than being an asset purchased for use in producing goods.” Other times, goodwill is considered an operating asset when the investment is presumed to be strategic in nature. Accumulated depreciation is typically removed from NOA, as fixed assets are calculated as net fixed assets. Adjustments will sometimes be made to normalize NOA, such as when accelerated depreciation is utilized. Overall, it is important for investors to fully analyze a company’s assets in order to correctly calculate, analyze, and compare RNOA.

Posted 3

Good morning class,

When an analyst calculates the return on net operating assets, he may adjust the denominator (net operating assets) in various ways. Each of these adjustments will change the amount of the return. Therefore, it’s important to consider which adjustments to make and why. The following are three possible adjustments and their effect on the return.

  1. Non-operating asset adjustment: Removing non-operating assets from the ratio will have the effect of increasing the return. One reason to make this adjustment is to exclude assets that aren’t used in the normal course of business.
  2. Intangible asset adjustment: This adjustment subtracts a company’s intangible assets from operating assets, which will have the effect of increasing the return.
  3. Accumulated depreciation adjustment: One thing to consider with this adjustment is that it’s technically a noncash expense, meaning that there is no cash outflow associated with the expense.

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