Table of Contents
What is the NOPAT Formula?
NOPAT (Net Operating Profit After Taxes) formula measure of profit that excludes the costs and tax benefits of debt financing. It is the representation of the operating income or the earnings before interest and taxes (EBIT) adjusted for the impact of taxes.
Mathematically, 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.
Explanation of the NOPAT Formula
The formula for calculation of NOPAT can be derived by using the following three steps:
Step 1: Firstly, the EBIT of the company is determined on the basis of information available in the income statement. EBIT is computed by deducting the cost of goods sold and operating expenses from the total revenue of the company.
EBIT = Total revenue – Cost of goods sold– Operating expenses
Step 2: 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).
Step 3: 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 Formula (with Excel Template)
Let’s see some simple to advanced examples of Net operating profit after tax (NOPAT) formula 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, the NOPAT of the company can be calculated as,
- NOPAT Formula = $55,000 * (1 – 20%)
- NOPAT = $44,000
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,
NOPAT (in Millions) = EBIT * (1 – Tax rate)
Calculation of NOPAT for Sep 24, 2016
- NOPAT Formula = $45,687 * (1 – 35.00%)
- NOPAT = $39,016
Calculation of NOPAT for Sep 30, 2017
- NOPAT Formula = $61,344 * (1 – 35.00%)
- NOPAT = $39,874
Calculation of NOPAT for Sep 29, 2018
- NOPAT Formula = $70,898 * (1 – 24.50%)
- NOPAT = $53,527.99 ~ $53,528
Therefore, Apple Inc.’s NOPAT stood at $53,528 Mn for the financial year ended on September 29, 2018.
You can use the following calculator.
|NOPAT Formula = EBIT * (1 − Tax Rate)|
|0 * (1 − 0) = 0|
Relevance and Use of NOPAT Formula
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 equation for NOPAT helps an analyst to view how well the core operations of a company is 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 the NOPAT equation 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.
You can download this NOPAT Formula Excel Template from here – NOPAT Formula Excel Template
This has been a guide to what is NOPAT (Net Operating Profit After Tax) Formula. Here we discuss how to calculate NOPAT using practical examples & downloadable excel template. You can learn more about financial analysis from the following articles –