Net Operating Profit After Tax (NOPAT)

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:

            NOPAT = EBIT(1-t)

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.

Example:

Here is a hypothetical example:

            Sales Revenue                    : Rs.  100,000
            CAGS                                  : Rs.   30,000
                                                            _____________
            Gross Margin                       : Rs.   70,000
            Operating Expenses             : Rs.   15,000
                                                            _____________
            Operating Profit (EBIT)         : Rs.   55,000
            Tax Expenses (EBIT x t)       : Rs.   20,000
            (t=40%)                                  _____________
            NOPAT                                :Rs.    35,000
                                                            _____________

Hence, this concludes the definition of Net Operating Profit After Tax (NOPAT) along with its overview.

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