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. Profit

    A financial benefit that is realized when the amount of revenue ...
  2. Economic Value Added - EVA

    Economic value added is a financial performance metric based ...
  3. Operating Margin

    Operating margin is a measure of a company's profitability, and ...
  4. Return On Net Assets - RONA

    A measure of financial performance calculated as: Fixed assets ...
  5. Operating Earnings

    Operating earnings are profit earned after subtracting from revenues ...
  6. Net Profit Margin

    Net Margin is the ratio of net profits to revenues for a company ...
Related Articles
  1. Investing

    Understanding profit metrics: Gross, operating and net profits

    Rather than relying solely on a company's net profit figures, seasoned investors will often look at gross profit and operating profit as well.
  2. Taxes

    Which Countries Have the Highest Taxes on High Incomes?

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

    How Tax Cuts Stimulate the Economy

    Learn the logic behind the belief that reducing government income benefits everyone.
  4. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  5. Investing

    Operating Profit

    Operating profit is the profit generated from the core business of a company before accounting for interest and taxes.
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. How can I use Net Operating Profit After Tax (NOPAT) to compare companies and make ...

    Learn what net operating profit after tax (NOPAT) measures. Understand how an investor can use NOPAT after tax to compare ... Read Answer >>
  3. 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 >>
  4. 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 >>
  5. What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

    Learn what operating cash flow and net operating income are, how the two metrics are calculated and the main difference between ... Read Answer >>
Hot Definitions
  1. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  2. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  3. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  4. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
  5. Interest Coverage Ratio

    The interest coverage ratio is a debt ratio and profitability ratio used to determine how easily a company can pay interest ...
  6. Cash Conversion Cycle - CCC

    Cash conversion cycle (CCC) is a metric that expresses the length of time, in days, that it takes for a company to convert ...
Trading Center