What is Profit After Tax?
Profit after tax (PAT) can be termed as the net profit available for the shareholders after paying all the expenses and taxes by the business unit. The business unit can be any type such as private limited, public limited, government-owned, privately-owned company, etc.
Tax is an integral part of an ongoing business. After paying all the operating expenses, non-operating expenses, interest on a loan, etc, the business is left out with a number of profits which is known as profit before tax or PBT and thereafter the tax is calculated on the available profit. After deducting the taxation amount, the business derives its net profit or profit after tax (PAT).
Formula of Profit after tax
The formula of PAT can describe as below:
- Profit before tax: It is determined by the total expenses (both operating expense and non-operating) excluded from Total revenue (operating revenue and non-operating revenue).
- Taxation: The taxation is calculated on PBT and the rate of taxation is determined by the geographical location of the country. For example, in India, the taxation rate stands at 30% (approximately).
After calculating the taxable amount, it is subtracted from PBT to get Profit after-tax or Net profit. However, in the case of negative Profit before tax (when total expenses exceed total revenue), the taxable component is not required. Tax is only applicable in case of profitability.
Examples of Net Profit After Tax
Below are some examples of PAT.
Example #1
Suppose ABC private limited earns revenue of $ 500 and it’s operating and non-operating expenses stand at $150 and $68 respectively. Tax rate stands at 30%. Calculate profit after tax (PAT) for the company.
Solution:
From the above data, we get the following information.
Thus, if we deduct Non operating expenses and operating expenses from Revenue we would get Profit before tax.
- PBT = $ 500- $(150+68)
- = $ 282
Now calculate Taxable amount by using PBT and given tax rate.
- Taxable Amount = Tax @30% on PBT
- = (30% of $282)
- = $84.6
Therefore as per formula
- PAT = Profit before tax – Tax
- =$(282- 84.6)
- = $197.4
Example #2
Suppose Australia and New Zealand Banking Group Limited earns revenue of $ 14,514 and its operating and non-operating expenses stand at $6,508 and $3,250 respectively. Tax rate stands at 28%. Calculate net profit after tax for the company.
Solution:
From the above data, we get the following information.
Thus, if we deduct Non operating expenses and operating expenses from Revenue we would get Profit before tax.
- PBT = $ 14,514 – $(6,508 +3,250)
- = $ 4,756
Now calculate Taxable amount by using PBT and given tax rate.
- Taxable amount = Tax @28% on PBT
- = (28% of $4,756)
- = $1,331.68
Therefore, as per the formula
- PAT = Profit before tax – Tax
- = $(4,756-1,331.68)
- = $3,424.32
Advantages
- PAT helps to determine the health of the business. It is an important parameter to evaluate business performances by the shareholders.
- PAT determines the margin, operational efficiency, and remaining profits as well as dividends which are distributed after paying all the expenses.
- Higher PAT determines higher efficiency of the business and lower PAT indicates average or below average operational efficiency of the business.
- Dividend distribution is directly proportionate with the PAT as higher the amount, higher would be the dividend yield.
- The stock price of a particular business also depends on PAT, as the profit growth helps the increment of the stock price and vice versa.
- Because of profitability, the government of the particular company gets the taxable amount which is used for the betterment and development of the respective countries. Dividends are also distributed to investors or shareholders.
All the above conditions are applied in case of Profitability or incase of higher revenue and lower expenses.
Disadvantages
- It is calculated only in the case of profitability. During losses, tax is not applicable and hence the business is not sustainable during continuous losses.
- Poor operational efficiency leads to losses. Thus, there is a question mark on the management, business model and on the cost-effectiveness of the business.
- In case of a higher Tax rate, Net Profit after tax or the Bottom-line of the company decreases leaving less amount for the shareholders as well as ‘reserves and surpluses’.
Limitations
- PAT does not apply in case of operating losses.
- Tax is not calculated during losses.
Important Points
- It reflects the profitability of a particular business. In other words, higher profitability (comparing to its previous year or with its peers) indicates better business prospects.
- The growth of a business is determined by Bottom-line growth. If the growth rate of Profit after tax is higher than the Revenue, then the margin of the business has expanded in real terms which indicate positivity and better pricing power of the business compare with its peers.
- However, in tepid economic times, PAT gets reduced as the operating expenses increase more than the revenue growth.
Conclusion
Profit after tax or Net profit or the bottom-line is denoted by the earnings left after incurring all the expenses by the company. Higher profitability denotes higher PAT and lowers profitability denote lower Profit after tax. However, sometimes due to loss or profit from exceptional items leads to abnormal decrease or increase in profitability or even losses.
In some cases, a tax rebate is being adjusted with and a refund is added to the loss amount which might lead to a reduction of losses. PAT is the primary aspect of any business which determines the future of the particular business as the remaining profitability is for further expansion through capital expenditure.
Recommended Articles
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