It links financial drivers to the qualitative elements that include external environment, opportunities and risks, governance, resource allocation and future outlook. These elements also serve as lead indicators, providing invaluable insights as to whether the strategy and tactics are aligned and or require modification(s).
The table below, a component of a financial model based on a Storytelling series, sets out the NOPLAT[1] calculation and from which we can reconcile to the accounting numbers as well as computing the economic profit (loss) generated and enterprise/ firm value. Comparing the NOPLAT to the accompanying Invested Capital clues us in as to whether the business model is creating shareholder value. A ROIC[2] that exceeds the WACC [3]signals value creation. The Year 1 and 2 economic profits are 11.5% and 15.3% respectively. This is a good sign for the business model concerned.
Company Name: WeCanTrust NOPLAT CALCULATION AND RECONCILIATION |
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NOPLAT CALCULATION AND RECONCILIATION |
Year 1 |
Year 2 |
Year 3 |
|
EBIT[4] |
$ 716,000 |
$ 3,156,000 |
$ 4,979,000 |
|
Add: Goodwill |
$ - |
$ - |
$ - |
|
Adjusted EBIT |
$ 716,000 |
$ 3,156,000 |
$ 4,979,000 |
|
Taxes on EBIT |
$ (887,500) |
$ (1,048,500) |
$ (2,639,500) |
|
Changes in Deferred Taxes |
$ 800,000 |
$ (200,000) |
$ (200,000) |
|
NOPLAT |
$ 628,500 |
$ 1,907,500 |
$ 2,139,500 |
|
Taxes[5] On EBIT |
||||
Provision on Taxes |
$ 800,000 |
$ 858,500 |
$ 2,474,500 |
|
Tax Shield on interest expense |
$ 102,500 |
$ 215,000 |
$ 190,000 |
|
Taxes on Interest Income |
$ (15,000) |
$ (25,000) |
$ (25,000) |
|
Taxes on Non-Operating Income |
$ - |
$ - |
$ - |
|
Taxes on EBIT |
$ 887,500 |
$ 1,048,500 |
$ 2,639,500 |
|
Reconciliation to Net Income |
||||
Net Income |
$ (259,000) |
$ 1,917,500 |
$ 2,474,500 |
|
Add: Increase in deferred taxes |
$ 800,000 |
$ (200,000) |
$ (200,000) |
|
Add: Goodwill amortisation |
$ - |
$ - |
$ - |
|
Adjusted Net Income |
$ 541,000 |
$ 1,717,500 |
$ 2,274,500 |
|
Add: Interest expense after-tax |
$ 102,500 |
$ 215,000 |
$ 190,000 |
|
Total Income to Investors |
$ 643,500 |
$ 1,932,500 |
$ 2,464,500 |
|
Less: Interest income after-tax |
$ (15,000) |
$ (25,000) |
$ (25,000) |
|
Non-operating expense (income) |
$ - |
$ - |
$ (300,000) |
|
NOPLAT |
$ 628,500 |
$ 1,907,500 |
$ 2,139,500 |
|
check digit |
$ - |
$ - |
$ - |
|
Invested Capital |
||||
Operating Current Assets |
$ 1,816,667 |
$ 3,650,000 |
$ 5,075,000 |
|
Non-Interest Bearing Current Liabilities |
$ (1,683,167) |
$ (3,399,000) |
$ (4,738,500) |
|
Net Working Capital |
$ 133,500 |
$ 251,000 |
$ 336,500 |
|
Net Fixed Assets |
$ 8,000,000 |
$ 7,600,000 |
$ 5,600,000 |
|
Other Operating Assets |
$ - |
$ - |
$ - |
|
Value of operating leases |
||||
Operating invested capital |
$ 8,133,500 |
$ 7,851,000 |
$ 5,936,500 |
|
Excess marketable securities |
$ 2,407,500 |
$ 4,407,500 |
$ 7,737,750 |
|
Goodwill |
$ - |
$ - |
$ - |
|
Non-operating investments |
$ - |
$ - |
$ - |
|
$ 10,541,000 |
$ 12,258,500 |
$ 13,674,250 |
||
Reconciliation - Invested Capital |
||||
Equity |
$ 5,741,000 |
$ 7,658,500 |
$ 9,274,250 |
|
Deferred Taxes |
$ 800,000 |
$ 600,000 |
$ 400,000 |
|
Adjusted equity |
$ 6,541,000 |
$ 8,258,500 |
$ 9,674,250 |
|
All interest bearing debts |
$ 4,000,000 |
$ 4,000,000 |
$ 4,000,000 |
|
Value of operating leases |
$ - |
$ - |
$ - |
|
$ 10,541,000 |
$ 12,258,500 |
$ 13,674,250 |
||
check digit |
$ - |
$ - |
$ - |
|
ROIC Calculation |
||||
NOPLAT |
$ 628,500 |
$ 1,907,500 |
$ 2,139,500 |
|
Operating invested capital ( ob[6]) |
$ - |
$ 8,133,500 |
$ 7,851,000 |
|
ROIC |
NA |
23% |
27% |
|
ROIC ( including goodwill ) |
NA |
23% |
27% |
|
Economic Profit Calculation |
||||
Return on Invested capital |
NA |
23.5% |
27.3% |
|
WACC |
12.0% |
12.0% |
12.0% |
|
Economic Profit |
NA |
11.5% |
15.3% |
In the Storytelling blog category, we have kicked-start the journey of reviewing the model build i.e. drilling down to the underlying assumptions and associated quantification; thereby connecting the dots between the financial and non-financial metrics.
The end goal is to validate the purpose in being for the business model, setting of objectives, measures and targets, initiatives to be commissioned and the resources to be allocated in order for the vision and strategy to be realised. The idea being what gets measured gets managed.
Any successful, sustainable outcome is predicated on a sound purpose in being and the underlying core values. It goes without saying, getting the right people on-board, pre-disposed to the philosophy and core values upon which the business model sits; is an absolute must in order to achieve sustainable value creation.
[1] Net operating profit less adjusted taxes
[2] Return on Invested Capital ( NOPLAT divided by Invested Capital )
[3] Weighted Average Cost of Capital
[4] Earnings before interest and taxes
[5] Corporate income tax rate of 50% and assuming no capital gain tax
[6] Opening balance