NOPAT Vs Net Income

Updated on April 30, 2024
Article byWallstreetmojo Team
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

What Is NOPAT Vs Net Income?

The key difference between NOPAT vs. Net Income is that NOPAT refers to the net operating profit after tax, where it calculates the net earnings of the business before deducting the interest charges but after directly deducting the tax on such operating income earned to see the business actual operating efficiency as it does not take into account the tax benefit of existing debt.

NOPAT-vs-Net-Income Difference

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In contrast, net Income refers to the business’s earnings that are earned during the period after considering all the expenses incurred by the company during that period. As an investor, it’s wise not to become a one-eyed deer. You will gain much more insight into a company when you look at all of the aspects of the profitability of the company.

NOPAT Vs Net Income Explained

First, the investor should look at all four financial statementsFinancial StatementsFinancial statements are written reports prepared by a company's management to present the company's financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. Then they should look at net income, NOPAT, net cash inflow/outflow, net revenue, return on total assets, return on equityReturn On EquityReturn on Equity (ROE) represents financial performance of a company. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit.read more, return on capital invested, etc.

Having a look at all of these statements and ratios will give a solid idea about whether to invest in a particular company or not.

From the point of view of an investor, they have two options. They can look at the net income as every investor does, or they can become wise and check both – net income and NOPATNOPATNOPAT, 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 has no debt in its capital and, as a result, ignores the interest payments and tax advantages that companies receive by issuing debt in their capital.read more (net operating profit after tax).

How a business operates operationally can be described better by NOPAT than by Net Income. Even if there’s a key difference between net income and NOPAT, looking at each of them would give the investors the clarity they need to decide whether to invest in a company or not.

In this article, we look at the top differences between NOPAT vs. Net Income and why as an investor, they should care?

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Infographics

Here are the top differences between NOPAT vs. Net Income; it’s worth looking at the differences. The infographics will help in understanding them as well as keeping the main points of difference in mind because the table below summarizes them very well.

NOPAT-vs-Net-Income Infographics

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Key Differences 

There are many differences between the NOPAT vs. Net Income. Going through them in details pointwise will help in understanding them and differentiating easily. Let’s have a look –

  • NOPAT is a measure of operational efficiency for investors. If investors know “net income,” they can ascertain NOPAT easily. But if they know NOPAT, to ascertain “net income,” they need to know the interest rate on debt.
  • While calculating NOPAT, interest expenses on debt are not deducted. While ascertaining net income, interest expenses on debt are deducted.
  • NOPAT helps investors make a comparison among firms on operational efficiency. Net income helps investors get a profitability ratio of the firm (but looking at net income doesn’t create value since to find out “net income,” even non-cash expenses like depreciation is also deducted).
  • In NOPAT, the actual income tax expenses are calculated. But in net income, tax expenses get significantly reduced due to the effect of leverage.
  • Looking at one ratio will not offer the investors sufficiency; each investor should look at both NOPAT and net income to get an idea of profitability, actual taxes to be paid, interest expenses on debtInterest Expenses On DebtInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more, and the effect of leverage on profitability.
  • Calculating NOPAT is a no-brainer. On the other hand, ascertaining “net income” needs a bit more time and calculation.

Comparison Table

Basis for Comparison between NOPAT and Net IncomeNOPATNet Income
1.    Inherent meaningNOPAT is calculated on operating income to determine the company’s operating efficiency.Net Income is calculated by deducting all the expenses from revenue.
2.    Application NOPAT is used to understand operational efficiency without leverage.Net Income is the most common measure of the profitability of a company.
3.    Is interest expenses deducted?No.Yes.
4.    Importance
NOPAT doesn’t take interest expenses on debt into account.
Net Income is deduced by deducting every possible expense from the revenue.
5.    Specifically useful toInvestors.Shareholders, investors, and external stakeholders;
6.    CalculationNOPAT = Operating Income * (1 – Tax Rate)Net Income = Net profit – Interest exp. – Taxes – Dividends paid to preference shareholdersPreference ShareholdersA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more.
7.    Used forTo compare the performances between two/more firms.To evaluate the overall company’s performance.
8.    Does it take leverage into account?No.Yes.

NOPAT vs. Net Income Video

This has been a guide to what is NOPAT Vs Net Income. We explain the differences with the help of infographics, key differences and comparative table. You may also have a look at the following articles for gaining further knowledge in Accounting –