Calculate the Net Operating Profit After Tax of any company.
What is NOPAT?
The Net Operating Profit After Tax (NOPAT) is a metric of a company's profitability. It represents the company's profit after deducting income tax assuming the company has no debt.
NOPAT is helpful for analyzing the company's performance over time and comparing similar companies.
Since interest payments are not considered while calculating NOPAT, it allows comparison of the companies regardless of the source of their financing.
How to calculate NOPAT?
The calculation is straightforward, and all the required information can be found on the company's financial statement for a given period.
NOPAT value can be worked out using the following equation:
NOPAT = EBIT * (1 - TAX_RATE)
- EBIT - Earnings Before Interests and Tax
- TAX_RATE - percentage value of income tax
NOPAT calculation example
Let's calculate the NOPAT value for a retail company. The company's financial data look as follows:
Cost of Goods Sold (COGS): $55,000,000
Operating expenses: (SG&A): $15,000,000
Income Tax Rate: 35%
Gross Profit: $45,000,000
Operating Profit: $30,000,000
NOPAT = EBIT * (1-TAX_RATE) = $30,000,000 * (1-35%) = $19,500,000
For sure, NOPAT is a valuable metric. However, it has its pros and cons you need to be aware of in order to be able to interpret the results correctly.
Advantages of NOPAT
- NOPAT is easy to calculate
- All the required data is easily accessible in P&L
- It gives an accurate company's profit value without involving debt payments.
Disadvantages of NOPAT
- Because NOPAT is not expressed as a percentage value, it doesn't allow for the direct comparison of companies that differ in size.
NOPAT is a crucial component of ROIC calculation.