Total Net Operating Capital
Total net operating capital represents all the current and non-currents assets used by a business in its operations. It includes inventories, accounts receivables, fixed assets, etc.
Total net operating capital is an important input in calculation of free cash flow. Free cash flow equals net operating profit after taxes minus change in total net operating capital over the period.
Formula
Total Net Operating Capital = Net Operating Working Capital + Non-current Operating Assets
Net Operating Working Capital = Operating Current Assets − Operating Current Liabilities
Example
Calculate total net operating capital for Best Buy Inc. (NYSE: BBY) using the following balance sheets. All amounts are in USD in million.
| 02-Feb-12 | 03-Mar-12 | |
|---|---|---|
| Current Assets | ||
| Cash and cash equivalents | 1,826 | 1,199 |
| Receivables | 2,704 | 2,288 |
| Merchandise inventories | 6,571 | 5,731 |
| Other current assets | 946 | 1,079 |
| Total current assets | 12,047 | 10,297 |
| Net property and equipment | 3,270 | 3,471 |
| Goodwill | 528 | 1,335 |
| Trade names, Net | 131 | 130 |
| Customer Relationships, Net | 203 | 229 |
| Equity and Other Investments | 86 | 140 |
| Other Assets | 522 | 403 |
| Total Assets | 16,787 | 16,005 |
| Accounts payable | 6,951 | 5,364 |
| Unredeemed gift card liabilities | 428 | 456 |
| Accrued compensation and related expenses | 520 | 539 |
| Accrued liabilities | 1,639 | 1,685 |
| Accrued income taxes | 129 | 288 |
| Short-term debt | 596 | 480 |
| Current portion of long-term debt | 547 | 43 |
| Total current liabilities | 10,810 | 8,855 |
Solution
| 02-Feb-12 | 03-Mar-12 | |
|---|---|---|
| Cash and cash equivalents | 1,826 | 1,199 |
| Receivables | 2,704 | 2,288 |
| Merchandise inventories | 6,571 | 5,731 |
| Operating current assets (A) | 11,101 | 9,218 |
| Accounts payable | 6,951 | 5,364 |
| Unredeemed gift card liabilities | 428 | 456 |
| Accrued compensation and related expenses | 520 | 539 |
| Accrued liabilities | 1,639 | 1,685 |
| Accrued income taxes | 129 | 288 |
| Operating current liabilities (B) | 9,667 | 8,332 |
| Net operating working capital (C=A-B) | 1,434 | 886 |
| Net property and equipment | 3,270 | 3,471 |
| Trade names, Net | 131 | 130 |
| Total operating assets (D) | 3,401 | 3,601 |
| Total net operating capital (C+D) | 4,835 | 4,487 |
by Obaidullah Jan, ACA, CFA and last modified on