10/3/2020 RNOA Framework

Use this "cheat sheet" to keep track of pertinent terminology.

You may also find it in the "Toolbox" section of this course.

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 1/19
10/3/2020 RNOA Framework

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 2/19
10/3/2020 RNOA Framework

The RNOA Framework

The RNOA Framework

The analysis of financial statements to make business decisions

involves comparisons.

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 3/19
10/3/2020 RNOA Framework

The RNOA Framework

The analysis of financial statements to make business decisions

involves comparisons.

Competitor firms

The RNOA Framework

The analysis of financial statements to make business decisions

involves comparisons.

Competitor firms
Companies over time

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 4/19
10/3/2020 RNOA Framework

The RNOA Framework

The analysis of financial statements to make business decisions

involves comparisons.

Competitor firms
Companies over time
Comparable transactions

The RNOA Framework

Apples-to-apples comparisons are complicated by:

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 5/19
10/3/2020 RNOA Framework

The RNOA Framework

Apples-to-apples comparisons are complicated by:

Financial leverage
Different accounting methods across companies
The interaction of accounting methods and growth
Transitory events

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 6/19
10/3/2020 RNOA Framework

Traditional Profitability Measures

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 7/19
10/3/2020 RNOA Framework

Traditional Profitability Measures

Traditional profitability measures intermingle financing and

operating.

Note that Total Assets includes assets like marketable securities,

which are financing, but ignores operating liabilities like accounts
payable, which reduce the need for financial debt or equity.

Traditional Profitability Measures

Similarly, many measures of leverage intermingle operating and

financing.

Note that Total Liability includes operating and financing debt.

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 8/19
10/3/2020 RNOA Framework

Miller and Modigliani Theorem

Miller and Modigliani Theorem

In principle, a firm creates value through operations.

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 9/19
10/3/2020 RNOA Framework

Miller and Modigliani Theorem

In principle, a firm creates value through operations.

Exceptions to separation:

Miller and Modigliani Theorem

In principle, a firm creates value through operations.

Exceptions to separation:

Taxes

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 10/19
10/3/2020 RNOA Framework

Miller and Modigliani Theorem

In principle, a firm creates value through operations.

Exceptions to separation:

Taxes
Signaling

Miller and Modigliani Theorem

In principle, a firm creates value through operations.

Exceptions to separation:

Taxes
Signaling
Market inefficiency

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 11/19
10/3/2020 RNOA Framework

Miller and Modigliani Theorem

Comparisons of performance of a company over time and across

competing firms would be more informative if operating and
financing are separated systematically.

Miller and Modigliani Theorem

Comparisons of performance of a company over time and across

competing firms would be more informative if operating and
financing are separated systematically.

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 12/19
10/3/2020 RNOA Framework

Changes in a Company’s Accounting over Time

Changes in a Company’s Accounting over Time

Differences in accounting across firms under comparison often

require an analyst to adjust accounting numbers, e.g., capitalization
of operating leases.

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 13/19
10/3/2020 RNOA Framework

Changes in a Company’s Accounting over Time

Differences in accounting across firms under comparison often

require an analyst to adjust accounting numbers, e.g., capitalization
of operating leases.

Adjustments are easier to execute and their impact on financial

statement measures of profitability, growth, and leverage are better
understood if operations and capital market financing are
separated.

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 14/19
10/3/2020 RNOA Framework

Value Benefits

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 15/19
10/3/2020 RNOA Framework

Value Benefits

Forecasting focused on value relevant items

Value Benefits

Forecasting focused on value relevant items

Calculation and
interpretation of free cash flow simplified

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 16/19
10/3/2020 RNOA Framework

Value Benefits

Forecasting focused on value relevant items

Calculation and
interpretation of free cash flow simplified
Valuation based on income approach (DDM, DCF, and RIM)
streamlined when rates of return and growth expressed
interms of operations aresubstituted for detailedpro forma
forecasts

Value Benefits

Forecasting focused on value relevant items

Calculation and
interpretation of free cash flow simplified
Valuation based on income approach (DDM, DCF, and RIM)
streamlined when rates of return and growth expressed
interms of operations aresubstituted for detailedpro forma
forecasts
Facilitates market approach (multiples) to valuation

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 17/19
10/3/2020 RNOA Framework

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 18/19
10/3/2020 RNOA Framework

Risk Analysis Benefits

Risk Analysis Benefits

Benefits augment traditional measures of profitability, coverage,

solvency, and liquidity used to assess credit risk and firm distress.

https://2nc.onlinemba.unc.edu/oyster/player/latest/index.html?segmentUuid=98287b33-7f5f-46af-a171-1a3e11da9596&print=true 19/19