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Definition: Net Operating Profit After Tax (NOPAT)
In corporate finance, a company’s net-operating-profit-after-tax is its after tax earnings from operations and is the same as EBIAT (Earnings Before Interest and After Tax). The formula for calculating NOPAT is as follows:
Where, EBIT = Earnings Before Interest and Taxes t = corporate tax rate
NOPAT is the free cash that is available to be distributed to a company’s shareholders, debtholders once investment in net working capital and capital expenditure has been deducted from it.
In case the company is unlevered i.e. free from any kind of debt, then the NOPAT is the same as PAT as there is no interest expense to be deducted from EBIT such that EBIT =EBT. Therefore, NOPAT gives a better measure of operational efficiency for leveraged companies as it does not consider the tax savings.
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