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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Net Operating Profit After Tax (NOPAT)

What it is:

Net operating profit after tax (NOPAT) is a measure of profit that excludes the costs and tax benefits of debt financing. Put another way, NOPAT is earnings before interest and taxes (EBIT) adjusted for the impact of taxes.

How it works (Example):

Net operating profit after tax (NOPAT) is also referred to as net operating profit less adjusted taxes (NOPLAT):

NOPAT = Operating Income x (1- Tax Rate)

To see how NOPAT works, consider Company XYZ's income statement:

Using this information and the formula above, we can calculate that Company XYZ's NOPAT is:

NOPAT = $150,000 x (1 - 0.36) = $96,000

Analysts often adjust operating income to convert accrual accounting to cash accounting or will capitalize some expenses (i.e., removed them from the income statement and pretend they were recorded on the balance sheet instead).

Why it Matters:

Note that NOPAT uses only operating income -- the income before taking interest payments into account. For this reason, NOPAT is a crucial measure in a variety of financial analyses because it gives a clearer view of operating efficiency -- a view that is not clouded by how leveraged the company is or how big of a bank loan it was able to get. This is important, because those interest payments on debt reduce net income and thus reduce the company's tax expense. Thus, NOPAT simply looks at how ell a company's core operations did, net of taxes. Accordingly, NOPAT is also used to calculate Economic Value Added (EVA)
It is important to note that some industries intrinsically have higher costs than others. This is why comparing NOPATs is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.

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