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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