Non-operating item
AccountingA gain or cost reported below operating profit that does not describe the trading business being forecast.
Also written: non-operating items, non-operating income, below the operating line
Non-operating items are the things sitting between operating profit and net income that have nothing to do with running the business: gains or losses on disposing of assets, the share of profit from an associate accounted for under the equity method, unrealised currency movements on borrowings, fair value swings on investments, and interest itself.
They matter in valuation because net income contains all of them. Anyone building a cash flow from the bottom of the income statement upward inherits every one, and several will not repeat next year. That is the second reason an unlevered build starts at EBIT rather than net income, the first being that net income sits below interest.
The subtlety is that operating profit is not automatically clean either. Restructuring charges, disposal gains on operating assets and impairments frequently sit above the operating line, so a normalisation step is still needed. The difference is that those adjustments are visible and arguable, whereas starting at net income buries them.
The associate case is the one most often missed. Equity accounted income is a share of somebody else's profit, and the associate has its own debt, tax and cash. It has no place in an operating cash flow, and the stake is instead valued separately and added in the bridge from enterprise value to equity value.
Worked example
A company reports EBIT of 380, interest of 40, a 25 gain on selling a warehouse, and 15 of equity accounted income from a joint venture.
Net income at a 25% tax rate is built off 380 less 40 plus 25 plus 15, which is 380 of pre tax profit, so 285 after tax. That figure looks identical to NOPAT on 380 of EBIT, purely by coincidence.
The unlevered build ignores all three lines below EBIT. The warehouse gain will not repeat, the joint venture income belongs to a stake valued separately, and the interest belongs in the discount rate.