Loading the player...

What is 'Net Operating Profit After Tax - NOPAT'

Net operating profit after tax (NOPAT) is a company's potential cash earnings if its capitalization were unleveraged — that is, if it had no debt. NOPAT is frequently used in economic value added (EVA) calculations. NOPAT is a more accurate look at operating efficiency for leveraged companies, and it does not include the tax savings many companies get because of existing debt.

BREAKING DOWN 'Net Operating Profit After Tax - NOPAT'

Net operating profit after tax shows how well a company performed through its core operations, net of taxes. The figure doesn't include one-time losses or charges; these don't provide a true representation of a company's true profitability. Some of these charges may include charges relating to a merger or acquisition, charges that, if considered, don't necessarily show an accurate picture of the company's operations, even though they may affect the company's bottom line that year.                     

Analysts look at many different measures of performance when assessing a company as an investment. The most commonly used measures of performance are sales and net income growth. Sales provide a top-line measure of performance, but they do not speak to operating efficiency. Net income includes operating expenses, but also includes tax savings from debt. Net operating profit after tax is a hybrid calculation that allows analysts to compare company performance without the influence of leverage. In this way, it is a more accurate measure of pure operating efficiency.

Net Operating Profit After Tax Example

Net operating profit after tax is calculated as operating income multiplied by 1, minus the tax rate:

                                  NOPAT = Operating Income x (1 - Tax Rate) 

Operating income is also referred to as earnings before interest and taxes (EBIT). For example, if EBIT is $10,000 and the tax rate is 30%, the calculation is $10,000 multiplied by 1 minus .3, or .7, which equals $7,000. This is an approximation of after-tax cash flows without the tax advantage of debt. Note that if a company does not have debt, net operating profit after tax is the same as net income after tax. When calculating net operating profit after tax, analysts like to compare against similar companies in the same industry, because some industries have higher or lower costs than others.

Interpretation of NOPAT and Uses

In addition to providing analysts with a measure of core operating efficiency without the influence of debt, mergers and acquisitions analysts use net operating profit after tax. They use this to calculate free cash flow to firm (FCFF) , which equals net operating profit after tax, minus changes in working capital. They also use it in the calculation of economic free cash flow to firm (FCFF), which equals net operating profit after tax minus capital. Both are primarily used by analysts looking for acquisition targets, since the acquirer's financing will replace the current financing arrangement. Another way to calculate net operating profit after tax is net income plus net after-tax interest expense, or net income plus net interest expense, multiplied by 1, minus the tax rate.

RELATED TERMS
  1. Net of Tax

    Net of tax is an accounting figure that has been adjusted for ...
  2. Profit

    Profit is the financial benefit realized when the amount of revenue ...
  3. Operating Margin

    Operating margin is a measure of a company's profitability, and ...
  4. Operating Ratio

    The operating ratio shows the efficiency of a company's management ...
  5. Effective Tax Rate

    The effective tax rate is the average rate at which an individual ...
  6. Tax Expense

    A tax expense is a liability owed to federal, state/provincial ...
Related Articles
  1. Investing

    Gross, Operating and Net Profit Margins

    A company’s income statement includes the company’s gross, operating and net profits.
  2. Investing

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  3. Investing

    Get A Richer Picture With The Penman-Nissim Framework

    Probability trends and profitability analysis are clearer when using this framework.
  4. Taxes

    Which Countries Have the Highest Taxes on High Incomes?

    These countries charge the highest taxes on high incomes.
  5. Taxes

    Comparing Long-Term vs. Short-Term Capital Gains Tax Rates

    An understanding of the taxation of long- and short-term capital gains is crucial to ensuring the benefits of your investment portfolio outweigh the costs.
  6. Taxes

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  7. Investing

    Cash flow statements: Reviewing cash flow from operations

    Discover why cash flow from operating activities is significant to businesses, and learn the direct and indirect methods for calculating it.
RELATED FAQS
  1. Why is it beneficial to use Net Operating Profit After Tax as opposed to net income ...

    Understand why it is beneficial to use net operating profit after tax as opposed to net income when making an investment ... Read Answer >>
  2. Is operating profit the same as net income?

    Understand the difference between operating profit and net income, including how each type relates to the other and how both ... Read Answer >>
  3. How do operating income and net income differ?

    Operating income and net income both show the income earned by a company, but they are distinctly different ways of expressing ... Read Answer >>
  4. How can a company improve its Economic Value Added (EVA)?

    Find out about some of the ways a company could try to improve its economic profit, also known as its economic value added, ... Read Answer >>
  5. What is the difference between operating cash flow and net income?

    Learn how net income is an income statement for a certain period of time, while cash flow shows inflows and outflows based ... Read Answer >>
Hot Definitions
  1. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  2. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  3. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  6. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
Trading Center