In business valuation, what is the purpose of calculating NOI?

The purpose of calculating Net Operating Income (NOI) in business valuation is to assess the operating income before expenses. NOI represents the income generated from the operation of a property after deducting all operating expenses, but it does not take into account financial costs such as mortgage payments or tax obligations. This metric is crucial for real estate investors and analysts as it provides a clear picture of a property's ability to generate income from its core operations, helping in assessing its profitability and performance.

By understanding the NOI, stakeholders can make informed decisions regarding the property's value and its potential for generating revenue. It serves as a foundational element in various valuation methodologies, including the income approach to property valuation. This also assists in calculating other important financial metrics, such as capitalization rates and cash flow analysis, which are essential for determining investment viability.