Net Operating Profit after Tax (NOPAT) 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.
NOPAT means “Net Operating Profit After Taxes”. Why Net Operating Profit After Taxes is used? Do you think Net Operating Profit After Taxes has any relevance in terms of ascertaining the right picture of financial affairs of the company? If so, how Net Operating Profit After Taxes is being calculated?
In this article, we will talk at length about Net Operating Profit After Taxes and learn how to compute it by using various examples.
- What is NOPAT?
- NOPAT Formula
- NOPAT Example (Basic)
- Nestle’s NOPAT Calculation
- Calculating Net Operating Profit After Taxes for Colgate
What is NOPAT?
NOPAT means “Net Operating Profit After Taxes”. This is being done to calculate the free cash flow before any merger or acquisition. And it is very useful to investors for the same reason.
So what do we mean by NOPAT? 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.
There is a particular reason for which Net Operating Profit After Taxes is useful. The reason is to get an idea of how the tax benefits of debt financing affect the cash flow. If a firm uses debt as a part of their capital structure, the firm gets tax benefits. So that’s the reason we deduct the taxes from the operating profit of the firm for the year and then use Net Operating Profit After Taxes before merger or acquisition.
NOPAT Formula
Net Operating Profit After Taxes formula is quite simple. Just look at the operating profit of the firm and then deduct the adjustable taxes from the operating profit and that’s it. You would get Net Operating Profit After Taxes.
In equation form, here’s the formula of NOPAT –
NOPAT = EBIT (1 – Tax Rate)
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In the examples below, we would see how to calculate Net Operating Profit After Taxes from the income statement.
NOPAT Example (Basic)
Let us now take a basic example of Net Operating Profit After Taxes. This is the list of information we have –
Income Statement of ABC Company:
In US $ | |
Revenue | 100,000 |
Cost of Goods Sold | 50,000 |
Labour | 30,000 |
General & Administrative Expenses | 5,000 |
Interest Expenses | 2,000 |
Tax Rate | 30% |
Now we need to calculate Net Operating Profit After Taxes. We have everything we need and here’s how to come up with NOPAT.
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In US $ | |
Revenue | 100,000 |
Cost of Goods Sold | (50,000) |
Gross Margin | 50,000 |
Labour | (30,000) |
General & Administrative Expenses | (5,000) |
Operating Income (EBIT) | 15,000 |
Interest Expenses | (2,000) |
Profit Before Tax | 13,000 |
Tax Rate (30% of Profit before tax) | (3,900) |
Net Income | 9,100 |
We have Net Income in front of us. So how would we calculate Net Operating Profit After Taxes? It’s quite simple. We can do it in two ways.
First, we can calculate by using EBIT and the tax rate. Let’s look at that first –
- Net Operating Profit After Taxes = EBIT * (1 – Tax Rate)
- Net Operating Profit After Taxes = US $15,000 * (1 – 0.30)
- Net Operating Profit After Taxes = US $15,000 * 0.70
- Net Operating Profit After Taxes = US $10,500
Nestle NOPAT Calculation
Let’s look at the Income statement of Nestle and then from the information we will calculate NOPAT.
Consolidated income statement for the year ended 31^{st} 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 compute the rate –
Profit before taxes, associates, joint ventures (A) | 11784 | 10268 |
Taxes (B) | 3305 | 3367 |
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 EBIT of Colgate in 2016 is $3,837 million
The EBIT above does contain noncash items like Depreciation and Amortization, Restructuring costs etc. However, non-recurring items like restructuring cost 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 calculat the tax rate required for calculating NOPAT.
We can directly calculate the effective tax rates 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 = Adjusted EBIT x (1-tax rate)
- NOPAT (2016) = $4,065 million x (1-0.3082) = $2,812 million
NOPAT Video
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This has been a guide to what is NOPAT, when it used along with practical examples of Net Operating Profit After Taxes calculations for Colgate and Nestle. You may also have a look at the following articles to learn more about financial ratios –
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- NOPAT Formula
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