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:

Profit After Tax (PAT) = Profit Before Tax (PBT) – Tax Rate
Profit-After-Tax-(PAT)

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  • 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.

You can download this Profit After Tax Excel Template here – Profit After Tax Excel Template

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.

Profit After Tax Example 1-1
  • PBT = $ 500- $(150+68)
  • = $ 282

Now calculate Taxable amount by using PBT and given tax rate.

Profit After Tax Example 1-2.png
  • Taxable Amount = Tax @30% on PBT
  • = (30% of $282)
  • = $84.6

Therefore as per formula

Profit After Tax Example 1-3
  • 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.

PAT Example 2-1
  • PBT = $ 14,514 – $(6,508 +3,250)
  • = $ 4,756

Now calculate Taxable amount by using PBT and given tax rate.

PAT Example 2-2
  • Taxable amount = Tax @28% on PBT
  • = (28% of $4,756)
  • = $1,331.68

Therefore, as per the formula

PAT Example 2-3
  • PAT = Profit before tax – Tax
  •  = $(4,756-1,331.68)
  • = $3,424.32

Advantages

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.’

 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 rebateRebateA rebate is a cashback to the customers against the purchase as a completing transaction incentive. Rebates are offered after the sale. Thus, it is a form of marketing strategy provided to the client to facilitate future transactions.read more is adjusted, 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 expenditureCapital ExpenditureCapex or Capital Expenditure is the expense of the company's total purchases of assets during a given period determined by adding the net increase in factory, property, equipment, and depreciation expense during a fiscal year.read more.

Recommended Articles

This article has been a guide to Profit After Tax and its definition. Here we discuss the formula to calculate net profit after tax along with withe examples, advantages, and disadvantages. You can learn more about accounting from the following articles –

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