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 useful when analyzing the company’s performance over time and when 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 very easy and all the required information could be found on the financial statement of the company for a given period.
NOPAT value can be worked out using following equation:
NOPAT = EBIT * (1 - TAX_RATE)
TAX_RATE - percentage value of income tax
NOPAT calculation example
Let’s calculate the NOPAT value for a retail company. The company 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 useful metric. However it has its own 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 a accurate company’s profit value without involving the debt payments
Disadvantages of NOPAT
Because NOPAT is not expressed as a percentage value it doesn’t allow for the direct comparison of companies different in size
NOPAT is crutial component of ROIC calculation.