What Is Net Operating Profit Less Adjusted Taxes (NOPLAT)?

Net Operating Profit Less Adjusted Taxes (NOPLAT) is a financial metric that calculates a firm's operating profits after adjusting for taxes. By using operating income, or income before taking interest payments into account, NOPLAT serves as a better indicator of operating efficiency than net income.

Understanding Net Operating Profit Less Adjusted Taxes (NOPLAT)

Net Operating Profit Less Adjusted Taxes (NOPLAT) is a company’s earnings before interest and taxes (EBIT) after making adjustments for deferred taxes. The tax is adjusted to reflect the un-leveraged profits of the firm without taking into account the effects of tax debt. In effect, this metric is a profit measurement that includes the costs and tax benefits of debt financing. The effects of a firm’s capital structure are excluded from this profit measurement tool by removing the monetary costs of equity and debt from the NOPLAT calculation. Since NOPLAT minus cost of capital equals a firm’s economic profit, NOPLAT is also used to calculate Economic Value Added (EVA). The EVA is a measure of management performance to compare economic profit to the total cost of capital.

Using NOPLAT, an analyst or investor is able to look into the profits generated by a company’s core operations after subtracting the income taxes related to the core operations and adding back in taxes that the company had overpaid during the accounting period. Any income generated from non-operating assets are not included, however, profit from invested capital is added. Operating income – the company’s profit before interest and taxes – shows us what the company would earn if it had no debt (no interest expense). Since only operating income is used, the evaluation of a business’ operating efficiency using NOPLAT is not impacted by how much leverage the company has or how much loans it has in its balance sheet given that debt servicing, that is, interest used to finance debt, negatively impacts a firm’s bottom line and, thus, decreases its tax expense.

NOPLAT for a firm is calculated as Operating Income x (1 - Tax Rate). For example, let’s compare the Net Operating Profit Less Adjusted Taxes for Bed Bath & Beyond Inc. (NASDAQ:BBBY) for the fiscal years ended March 3, 2018 and February 25, 2017.


(USD in thousands)



2018



2017



Revenue



$12,349,301



$12,215,757



Cost of Goods Sold



7,906,286



7,639,407



Gross Margin



4,443,015



4,576,350



Selling, general and admin. expenses



3,681,694



3,441,140



Operating Income or EBIT



761,321



1,135,210



Interest expense



65,661



69,555



Income Tax


(35.57% and 33.52%, respectively)



270,802



380,547



Net Income



$424,858



$685,108



NOPLAT



761,321 x (1 – 0.3557)


= $490,519



$1,135,210 x (1 – 0.3352) = $754,633


The increase in operating costs year-over-year led to a decrease in operating profits from 2017 to 2018 for Bed, Bath & Beyond. This, in turn, decreased NOPLAT.

Generally, a company that operates efficiently should have a positive NOPAT. An increase in NOPAT can translate into a higher stock price for a publicly traded company.

NOPLAT is used extensively in merger and acquisition (M&A), discounted cash flow (DCF), and leveraged buyout (LBO) models because it enables the calculation of an investment's free cash flow (FCF).