NOI, defined as an above-the-line item and calculated without one-time changes, is not prone to the potential effects of the isolated gains or losses that can significantly impact net income. Every firm is unique and should be analyzed with this tenet in mind. Net income, on the other hand, can be altered considerably by below-the-line items such as changes in accounting principles, special items and sales of discontinued operations. This is especially true in the current economic environment, where the slightest hint of potential fraud can send any stock price into a tailspin.
Why? Poor accounting can be treacherous from both an investor-relations and a price perspective. It is equally unjustifiable to classify one-time income, such as special items and the sale of discontinued operations, as part of the calculation of operating income and NOI. In other words, it is unwise for management to remove questionable expenses from the calculation of operating income if these expenses are part of recurring operations.
It Is More Difficult to Manipulate NOI Generally accepted accounting principles (GAAP) of various governments make it clear which income and expenses flow into operating income: hence, NOI should not be creative.
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