Profit After Tax (PAT)

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 several profits, which is known as profit before tax or PBT. After that, the tax is calculated on the available profit. After deducting the taxation amount, the business derives its net profit or profit after tax (PAT).

The formula of Profit after tax

The formula of PAT can describe as below:

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Source: Profit After Tax (PAT) (wallstreetmojo.com)

• Profit before tax: It is determined by the total expenses (both Opex and non-operating) excluded from Total revenue (operating revenue and non-operating revenue).
• Taxation: The taxation is calculated on PBT, and the geographical location of the country determines the rate of taxation. 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 profitabilityProfitabilityProfitability refers to a company's ability to generate revenue and maximize profit above its expenditure and operational costs. It is measured using specific ratios such as gross profit margin, EBITDA, and net profit margin. It aids investors in analyzing the company's performance.read more.

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. The tax rate stands at 30%. Calculate profit after tax (PAT) for the company.

Solution:

From the above data, we get the following information.

• Revenue of ABC private limited: $500
• Operating Expenses: $150
• Non-Operating Expenses: $68

Thus, if we deduct Non operating expensesNon Operating ExpensesNon operating expenses are those payments which have no relation with the principal business activities. These are the non-recurring items that appear in the company's income statement, along with the regular business expenses.read more 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. The tax rate stands at 28%. Calculate net profit after tax for the company.

Solution:

From the above data, we get the following information.

• Revenue: $14,514
• Operating Expenses: $6,508
• Non-Operating Expenses: $3,250

Thus, if we deduct Non operating expensesNon Operating ExpensesNon operating expenses are those payments which have no relation with the principal business activities. These are the non-recurring items that appear in the company's income statement, along with the regular business expenses.read more 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 the higher efficiency of the business, and lower PAT indicates average or below average operational efficiency of the business.
• Dividend distribution is directly proportionate to the PAT. As the higher the amount, the 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. DividendsDividendsDividend is that portion of profit which is distributed to the shareholders of the company as the reward for their investment in the company and its distribution amount is decided by the board of the company and thereafter approved by the shareholders of the company.read more 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.’