What is NOPAT?
NOPAT or Net Operating Profit after Tax is a profitability measure in which a company’s profit is calculated excluding the effect of leverage by assuming that the company does not have any debt in its capital and in turn, ignores the interest payments and the tax advantage which companies get by issuing debt in their capital.
It’s basically taking into account the EBIT (Earnings before interest and taxes) and then deducting the adjustable tax amount. For example, let’s say that EBIT is $40,000, and the adjustable tax is $8,000. Then the Net Operating Profit After Taxes would be = $(40,000 – 8,000) = $32,000.
Net operating profit after tax formula measures the performance of the company from its core operations after taking into consideration the applicable taxes and is calculated by multiplying the one minus tax rate by the operating income of the company.
Mathematically, the net operating profit after tax formula represented as below,
Net Operating Profit After Tax Formula is also known as Net Operating Profit less adjusted Taxes (NOPLAT). It is to be noted that the formula for NOPAT doesn’t include the one-time losses or charges. As such, it is a good representation of the operating profitability of a company.
Steps to Calculate NOPAT
- Firstly, the EBIT of the company is determined on the basis of information available in the income statement. EBIT is calculated by deducting the cost of goods soldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. and operating expenses from the total revenue of the company.
EBIT = Total revenue – Cost of goods sold– Operating expenses
- Now, the tax rate of the company is noted from the annual report of the company. Next, the tax-adjusted value is calculated by subtracting the tax rate from one, i.e. (1 – Tax rate).
- Finally, the formula for net operating profit after tax is derived by multiplying the EBIT with the value calculated in step 2, as shown above.
Examples of NOPAT
Let’s see some simple to advanced examples to understand it better.
Let us consider an example for the calculation of NOPAT for a company called PQR Ltd, which is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, the company has generated $150,000 in total revenue along with the following expenses.
Now, the operating income or EBIT of the company can be calculated as,
- EBIT = $150,000 – $70,000 – $25,000
- = $55,000
Therefore, it can be calculated as,
- NOPAT = $55,000 * (1 – 20%)
Therefore, the NOPAT of PQR Ltd is $44,000 for the given financial year.
Let us take the real-life example of Apple Inc.’s annual report as of 2016, 2017 and 2018. Calculate the NOPAT for Apple Inc. based on the following available information:
Now, the EBIT of Apple Inc. can be calculated as,
EBIT (in Millions) = Net sales-Cost of sales – Research and development expense – Selling, general and administrative expense
EBIT for Sep 24, 2016
- =$2,15,639 – $1,31,376 – $10,045 – $14,194
EBIT for Sep 30, 2017
- =$2,29,234 – $1,41,048 – $11,581 – $15,261
EBIT for Sep 29, 2018
- = $265,595 -$163,756 -$14,236 – $16,705
- = $70,898
Now, the calculation of NOPAT of Apple Inc. for Sep 24, 2016 is as follows,
Calculation of NOPAT for Sep 24, 2016
- NOPAT Formula = $45,687 * (1 – 35.00%)
- = $39,016
Calculation for Sep 30, 2017
- NOPAT = $61,344 * (1 – 35.00%)
- = $39,874
Calculation of NOPAT for Sep 29, 2018
- NOPAT = $70,898 * (1 – 24.50%)
- = $53,527.99 ~ $53,528
Therefore, Apple Inc.’s NOPAT stood at $53,528 Mn for the financial year ended on 29th September 2018.
Nestle NOPAT Calculation
Let’s look at the Income statement of Nestle
Consolidated income statement for the year ended 31st December 2014 & 2015
source: Nestle Annual Report
We have the Net Income now (Profit for the year) and also the EBIT (Operating Profit). But to get the adjusted tax rate, we need to calculate the rate.
As the tax rate is not mentioned, we will calculate the rate –
|Profit before taxes, associates, joint ventures (A)||11784||10268|
|Tax rate (B / A)||0.28||0.33|
By using this tax rate, we will calculate Net Operating Profit After Taxes for both of the years.
|Operating Profit (X)||12408||14019|
|Tax rate (Y)||0.28||0.33|
|Net Operating Profit After Taxes [X * ( 1 – Y)]||8934||9393|
This is the way you should take into account the information of income statement and then calculate NOPAT from the EBIT and adjusted tax rate.
Calculating Net Operating Profit After Taxes for Colgate
Let us now calculate Net Operating Profit After Taxes for Colgate. Below is the Income Statement of Colgate.
source: Colgate SEC Filings
- We note that the EBIT of Colgate in 2016 is $3,837 million
The EBIT above does contain noncash items like Depreciation and Amortization, Restructuring costsRestructuring CostsRestructuring Cost is the one-time expense incurred by the company in the process of reorganizing its business operations. It is done to improve the long term profitability and working efficiency. This expenditure is treated as the non-operating expenses in the financial statements., etc. However, non-recurring itemsNon-recurring ItemsNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off. like restructuring costs need to be adjusted for calculating NOPAT.
Below is the snapshot of Colgate’s restructuring costs from its 10K filings.
- Colgate’s restructuring charges in 2016 = $228 million
Adjusted EBIT = EBIT + Restrucutring Expenses
- Adjusted EBIT (2016) = $3,837 million + $228 million = $4,065 million
Let us now calculate the tax rate required for calculating NOPAT.
We can directly calculate the effective tax ratesCalculate The Effective Tax RatesEffective tax rate determines the average taxation rate for a corporation or an individual. For both, there is a similar formula only with variation in considering variables. The effective tax rate formula for corporation = Total tax expense / EBT from the income statement.
source: Colgate SEC Filings
Effective Tax rate = Provision for Income Taxes / Income Before income taxes
- Effective tax rate (2016) = $1,152/$3,738 = 30.82%
NOPAT Formula = Adjusted EBIT x (1-tax rate)
- NOPAT (2016) = $4,065 million x (1-0.3082) = $2,812 million
You can use the following calculator.
|NOPAT Formula = EBIT * (1 − Tax Rate)|
|0 * (1 − 0) = 0|
Relevance and Use
The formula for net operating profit after tax is basically a profitability metric that helps to assess how a company is operating efficiently, which is calculated by measuring profit that is adjusted for the costs and tax benefits of debt financing. NOPAT provides such a view that is not affected by the leverage of the company or the massive bank loan on its books. Such adjustment is essential because these interest payments on debt shrink the net income, which eventually reduces the tax expense of the company. Therefore, the formula for NOPAT helps an analyst to view how well the core operations of a company are performing (net of taxes). This is a profitability calculation which is measured in terms of dollars and not in percentages like most other financial terms.
However, there remains a limitation of the NOPAT that it is particularly useful when comparing similar companies in the same industry. Since it only measures profit in terms of dollar amount, investors and other financial users usually find it difficult to use this metric to compare differently sized (small & medium enterprise, mid-corporate, and large corporate) companies within an industry.
This article has been a guide to what is NOPAT (Net Operating Profit After Tax) and is the definition. Here we discuss the formula to calculate NOPAT using practical examples & a downloadable excel template. You can learn more about financial analysis from the following articles –