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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For eg:
Source: Profit After Tax (PAT) (wallstreetmojo.com)
- Profit before tax: It is determined by the total expenses (both OpexOpexOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more 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 distributionDividend DistributionDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more 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. DividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.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.’
Limitations
- PAT does not apply in case of operating lossesOperating LossesThe term "net operating loss" refers to an operating loss that occurs when a company's expenses exceed its revenues in a given period and is reflected in the accounting books in the period when the company's allowable tax deductions exceed current taxable income.read more.
- 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 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.
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