Components of RNOA: Margin and Turnover

Previously, I touched on the importance of Return on Net Operating Assets (RNOA), specifically with respect to my view that it's foolish to examine a firm's ROE without an idea as to the relative contributions of operating and nonoperating returns. I'd like to examine RNOA a bit further, and place some emphasis on it's dual components of margin and turnover. Just to refresh, the original formula for Operating Return is:


RNOA = Net Operating Profit After Taxes / Average Net Operating Assets


In order to illustrate the margin and turnover components, I'll create a new, equivalent equation:


RNOA = (Net Operating Profit Margin / Sales)  X (Sales / Net Operating Asset Turnover)


Therefore:


RNOA = Net Operating Profit Margin (NOPM)  X  Net Operating Asset Turnover (NOAT)


Truthfully, I don't blame you if this still doesn't make a whole lot of sense. So, let's look at this using some real numbers from the largest employer in the world/retail titan..WalMart (WMT).

Above I've included every part of an equation necessary to understand RNOA's components of NOPM and NOAT. Keep in mind that WalMart's RNOA was originally calculated using NOPAT/RNOA, or $15,637/$109,987 to yield 14.22%. To calculate Net Operating Profit Margin (NOPM) I took NOPAT of $15,637 and divided it by 2009 revenue of $401,244. The resulting 3.9% seems rather feeble for such a monster like WalMart; it means that for every dollar of sales revenue, WalMart is only earning 3.9 cents of after tax operating profit. Remember though that the margin is somewhat useless in the absence of turnover figures. To calculate Net Operating Asset Turnover (NOAT), I took 2009 revenue of $401,244 (millions by the way, crazy right) and divided it by Average Net Operating Assets of $109,987. The resulting NOAT is 3.65. Now multiply 3.9 (NOPM) by 3.65 (NOAT); the result should look familiar - 14.2%. Walmart's figures highlight an important concerning the relationship between margins and asset turnover. A high margin firm won't necessarily earn healthy returns for shareholders; it all depends on the turnover they are able to achieve given that level of margin.



I included WalMart's 20.63% ROE just to illustrate that the company is earning a very healthy operating return component of 69% (14.22RNOA / 20.63ROE). Interestingly, the company doesn't highlight this ratio in its financial presentations. Rather, they use a modified return on investment (ROI) formula that takes operating income as its starting point, and adds back in some non-cash adjustments for depreciation and amortization to arrive at the numerator. In the denominator, WalMart creates an average operating assets figure, similar to NOA except that operating liabilities are not netted out of the equation. Although investors should keep an eye on these metrics that are recommended by management, don't forget that they are non-GAAP and are probably suggested for a reason.


*no positions
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Wal-Mart Concedes Defeat, Shifts Tactics

In a move that was highly reminiscent of Phillip Morris' recent support of the tobacco legislation, Wal-Mart has come out in support of a mandate that would require large employers to provide health care to employees. This is an extremely common tactic, and it usually represents the point at which a corporation realizes that they can no longer fight a given policy, and that by at least pretending to support the measure, they will gain some amount of influence over the final crafting. Utility companies did the exact same thing in early 2007, when they realized that some form of carbon emmission limit would ultimately be imposed upon their industry, and it would be better to have a say than to not. We prefer the Phillip Morris example though; it seems to resonate the most with people.

*no position in WMT or MO. Long DUK

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Does the US Need More Wal-Mart Jobs?

Reuters reported this morning that Wal-Mart will hire an additional 22,000 individuals to staff its voluminous stores. Certainly, in this time of mounting job losses, a job at Wal-Mart is better than nothing as everyone has bills to pay. However, on a broader level, we are disturbed by what this announcement "means" for the country. Apparently, the deepest recession since the Great Depression has not been enough to derail Wal-Mart's growth. What then, could ever stop the discount retailer?

Obviously, those folks who view Wal-Mart as a net contributor to the US economy will cite the addition of 22,000 jobs as proof that the Company is a benevolent sort of Giant, offering regular Americans the chance to earn an honest living. The evidence however, suggests that Wal-Mart compensates it's associates so meagerly that they are forced to seek the refuge of Government assistance just to make ends meet. A Government inquiry into Wal-Mart's labor practices, the results of which are contained in the report below, concluded the following:

• In 2001, Wal-Mart Sales Clerk's earned on average $13,861 per year.
• In 2001, the federal poverty line for a family of three was $14,630.
• A 200 employee Wal-Mart store costs taxpayers an average of $420,750 per year.

Assuming that Wal-Mart's announcement of 22,000 new jobs corresponds with an opening of roughly 100 new stores(this is generous, and assumes that 9% of the jobs created will be white collar, higher paying positions), we could confidently say that Wal-Mart today was really announcing a cost to the federal taxpayers of $42,075,000. This figure doesn't even include the state and county level tax incentives that are so often used to lure Wal-Mart into a particular area.

Does the US need more Wal-Mart jobs? We would say no.

Wal-Mart's Labor Record

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