Net Operating Profit After Tax (NOPAT)
Net Operating Profit After Tax (NOPAT) is the profitability measurement which is used to calculate the theoretical cash of the company which company distributes among the shareholders of the company if the company has no debt.
In other words, NOPAT is the profit amount from the operation of the company after tax payment without regard to interest payment.
If the company have no obligations then the company can distribute the total money among the shareholders.
Definition: What is NOPAT?
Creditors and investors use NOPAT to find the efficiency of the company to pay its current obligations and pay to its shareholders. This is used only as a gauge because it does not give an accurate measurement.
Accrual method of earning creating the time difference between earnings are recognized for book purpose and earning are recognize or tax purpose. SO there is the difference between the calculated amount and the amount which is distributed among the shareholders.
To find the profitability of the company for the operations of the company analyst use this ratio. To find the operating efficiency of the company this ratio give the accurate result.
NOPAT formula can be calculated by the product of operating income of the company and 1 minus corporate tax rate.
Net operating profit after tax (NOPAT) = Operating profit x (1- Tax rate)
If the detailed income statement is not available and the net operating income cannot figure out then we need to use net income by backing out the interest payment as below.
Net Operating Profit After Tax (NOPAT) =Net profit + Net Interest x (1 – Tax rate )
It is the simple formula as compared to the above of this. Because operating profit, net income and interest expenses available on the income statement through which we can calculate NOPAT.
Now we take the example of the light bulb manufacturer which report the below-listed items on the income statement.
- Operating profit =$50
- Tax rate = 30%
From this, we can calculate NOPAT by putting in the NOPAT formula as
NOPAT = 50 x ( 1 – 30% ) = 35 dollars
If we use the second equation of NOPAT then we need net income and net interest for calculation of NOPAT. By putting the values of these after the calculation then we get the same result of 35 dollars from it also. Both equations of NOPAT give the same result if the company have no debt to pay off.
For any business operating profit and net profit are 2 important parameters. Operating profit is used to find the operating efficiency of the business whereas net profit tells how much overall profit company gets. In the operating profit, the tax amount is not included whereas in the net profit tax amount include.
NOPAT is the operating profit after the reducing of taxes. Without debt the operating performance of the company calculated by the Hybrid calculation of NOPAT.
NOPAT Meaning _ Analysis and Interpretation
On a standalone basis, the analysis of any ratio or number is not useful. For better result, you need to compare the history of the company with others in the industry. Through historical analysis, the analyst knows that the performance of the company improve or not and peer analysis shows that how the company stakes within the peer set in term of operational efficiency.
There are some reasons because of which NOPAT increase or decrease for some companies for 2 years or above. The changes in the result may be due to the operating margin or changing product mix etc.
For more Financial Ratio Check:
Net present value (NPV)
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