Non-operating assets are assets of the company that aren’t used in the main activity of the company. Such assets can be either financial or non-financial. This asset type is very important during the valuation of the business. The interpretation of non-operational assets depends on the type of the valuation:
- In case of DCF valuation, all these assets may be treated in few ways. If we are talking about firm’s cash flow valuation, then non-operating financial assets do not contribute any cash flow and they simply reduce the ‘net debt’. Unused non-financial-non-operating assets can be treated the same way as financial assets if they do not generate any cash flow for the firm (for example, valuable land plot in a city without any activity), but if such assets do generate income (for example, rented real estate), then it can be treated in two ways: (1) income has to stay in cash flow and assets are treated as standard assets of the company, or (2) income of these assets can be eliminated from the cash flow, but the market value of these assets should be added to the value of the company (reduce net debt).
- In case of relative valuation, the essence is similar as described above as long as it is applied to valuation multiples of a firm as EV/EBITDA. Then it can lower the ‘net debt’ in the same way as in case of DCF valuation (above). However, it is more difficult to make adjustments by these assets in case of valuation multiples of equity as P/E ratio. Then normally such assets could reduce market cap during the calculation only if they do not generate income (for P/E) but are valuable. Other adjustments are also possible but those require more professionalism and cannot be described in here.