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 whereas net Income refers to earnings of the business which is earned during the period after considering all the expenses incurred by the company during that period.
Differences Between NOPAT vs Net Income
If you’re an investor, you have two options. You can look at the net income as every investor does or you can become wise and check both – net income and NOPAT (net operating profit after tax).
- Net income is calculated by deducting all the expenses incurred during the year (including the non-cash expenses like depreciation and also interests & taxes) from the revenue of the company.
- NOPAT, on the other hand, is calculated by using the operating income.
How a business is doing operationally can be described better by NOPAT than 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 you as an investor should care?
NOPAT vs Net Income Infographics
Here are the top differences between NOPAT vs Net Income, it’s worth looking at the differences –
Key differences – NOPAT vs Net Income
There are many differences between NOPAT vs Net Income. Let’s have a look –
- NOPAT is a measure of operational efficiency for the 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 having a glance 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 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 the idea of profitability, actual taxes to be paid, interest expenses on debt, 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.
NOPAT vs Net Income (Comparison Table)
|Basis for Comparison between NOPAT and Net Income||NOPAT||Net Income|
|1. Inherent meaning||NOPAT is calculated on operating income to find out the operating efficiency of the company.||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 to||Investors.||Shareholders, investors, and external stakeholders.|
|6. Calculation||NOPAT = Operating Income * (1 – Tax Rate)||Net Income = Net profit – Interest exp. – Taxes – Dividends paid to preference shareholders.|
|7. Used for||To compare the performances between two/more firms.||To evaluate the overall company’s performance.|
|8. Does it take leverage into account?||No.||Yes.|
As an investor, it’s wise to not 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. First, you should look at all the four financial statements. Then you should look at net income, NOPAT, net cash inflow/outflow, net revenue, return on total assets, return on equity, 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.
NOPAT vs Net Income Video
This has been a guide to the top differences between NOPAT vs Net Income. Here we also discuss the NOPAT and Net Income differences with examples, infographics, and comparison tables. You may also have a look at the following articles for gaining further knowledge in Accounting –
- Examples of Coverage Ratio Formula
- Top 4 Differences Between Operating Profit and Net Profit
- Operating vs Net Income – Key Differences
- Markup vs Margin – Head to Head Differences
- Depreciation vs Amortization – Head to Head Differences
- Dividends vs Growth – Head to Head Differences
- ROIC vs ROCE – Key Differences
- 4 Types of Financial Statements
- Return on Average Capital Employed Formula
- Debt Coverage Ratio Formula
- Overhead Ratio Formula
- Retention Ratio Formula