Management is usually not responsible for creating value through financing activities unless the company is in the finance industry, therefore reformatting the balance sheet allows investors to value just the operating activities and hence get a more accurate valuation of the company.
NOA are mathematically equivalent to the invested capital (IC), which represents the funds invested into the company that demand a financial return in the form of dividends (equity) or interests (other short and long-term debts, excluding operating liabilities such as Accounts Payable).
Operating activities are anything that involves the day-to-day running of the business such as accounts receivable, inventory, etc.
; and financing activities are any accounts that are "interest-bearing" or have financial characteristics and are not related to the regular operations such as debt and equity investments.
This distinction is usually not visible on financial statements, thus needs to be estimated when calculating the NOA.
Financial assets are excluded, as they could be sold without disrupting the company's operations.
However, controlling stakes and investments in affiliates on which the company exercises a significant influence (typically over 20% ownership) are considered as operating assets due to their strategic importance in the operation of the company.
Alternatively, the invested capital (and thus the NOA) can be calculating as the net amount of interest-bearing debts:
Operating liabilities, such as Accounts Payable, are excluded as they do not normally generate interest expenses.
Calculating NOA is necessary for applying the Discounted Abnormal Operating Earnings valuation model.
DAOE is one of the most widely accepted valuation models because it is considered the least sensitive to forecast errors.
Invested capital is used in several important measurements of financial performance, including return on invested capital, economic value added, and free cash flow.