Business

NOPAT Definition: Formula for Net Operating Profit After Tax

Written by MasterClass

Last updated: Aug 30, 2022 • 3 min read

NOPAT is a financial metric companies use to look at their net profits without regard to nonoperating expenses like interest payments on debt. Executives, investors, and lenders can all benefit from seeing financial and income statements with prominent NOPAT calculations. Learn more about what NOPAT is and how you can use it.

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What Is NOPAT?

NOPAT stands for “net operating profit after tax.” This metric allows both you and external observers—like investors and lenders—to see what your company’s financials look like with no debt in your working capital structure.

To arrive at NOPAT, subtract all relevant costs from your gross profits while ignoring interest expenses and nonoperating income taxes. Since debt is often an instrument of tax savings, it can potentially obscure your true financial status as a company.

What Is the Importance of NOPAT?

NOPAT calculations allow you to see your business as if it were unlevered (e.g., completely debt-free). This gives internal and external stakeholders the ability to weigh the economic value of your business without regard to tax-deductible debts—although, you will still factor in most other taxes and liabilities to reduce your gross income as a company down to your net income.

3 Groups Who Stand to Gain From NOPAT Calculations

NOPAT numbers help increase the valuation of companies in the eyes of many key groups of people. Learn more about how these three groups stand to gain from NOPAT calculations:

  • Executives: NOPAT serves as a useful tool in determining how to reach operating efficiency as a company. While debt affects a company’s bottom line, it does so in a way that is tax deductible. NOPAT enables executives to see their business operations more clearly and determine whether they could fund their ventures without extra leverage. It also helps them determine the free cash flow to the firm (FCFF).
  • Investors: When deciding to invest in a company, investors want to look at balance sheets and financial statements from every angle they can. NOPAT calculations help entice investors eager to see a valuation of your company free of debt. They also provide another opportunity to see how mergers and acquisitions could proceed in the real world.
  • Lenders: Many companies use debt to fund their core operations. In order for lenders to see if it’s worth it to put up money for a company, they’ll want to use financial modeling capable of determining whether or not such a business can afford to take on new interest payments. NOPAT does this by revealing how much a company has left over after taxes but before debt payments.

What Is the NOPAT Formula?

As a basic template for NOPAT calculation, you can use the following formula: NOPAT = Operations income * (1 – effective tax rate).

Operations income stands as a variable for a company’s profitability overall. This is what you have left over as net income after paying for things like the cost of goods sold, tax expenses, and other expenditures besides debt.

If you’re unsure of your operations income, consider using this longer formula instead: NOPAT = (Net income + nonoperating income loss – nonoperating income gain + interest expense + tax expense) * (1 – effective tax rate).

NOPAT vs. EBIT

NOPAT (net operating profit after tax) and EBIT (earnings before interest and taxes) mainly differ in how they treat tax benefits and liabilities. NOPAT paints a picture of a business after taxes, whereas EBIT looks at net income before you take taxes into account.

On a similar note, EBITDA (earnings before interest, taxes, depreciation, and amortization) is an even more exhaustive metric you can use to look at your company’s financials before factoring in a host of different payable expenditures.

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