Denise Elizabeth P
Senior Financial Editor & Contributor
Last Updated: December 20, 2021
Date Published: December 20, 2021

## What is Net Operating Profit After Tax?

NOPAT or Net Operating Profit After Tax is one of the financial metrics that companies use to determine the profitability of the core operations of the business.

This includes net of taxes and usually for leveraged ones – meaning those that have debt.

Typically, the NOPAT of companies that have no debt is the same as the Net Income.

## Understanding Net Operating Profit After Tax (NOPAT)

NOPAT is used to measure the financial efficiency of the operations of the business without considering its capital structure – no debts to pay.

In doing so, analysts are able to make comparisons of companies belonging to the same industry.

Companies that are capital intensive such as manufacturing companies will not be the same as those of service industries.

In the computation of the NOPAT, one time charges due to charges or losses are not to be included because they are non-recurring or may be a one time expense such as expenses due to acquisition, merger or restructuring.

These expenses affect the net income of the company at the end of the year although they may not be directly related to the operations of the company.

NOPAT is considered to be the more accurate measure of the company’s efficiency because it takes into account the net profit without considering the impacts of capital structure.

The formula to compute for the NOPAT is:

NOPAT = Operating Income x (1 – Tax Rate), where Operating Income = Revenue – Operating Expenses

-or-

NOPAT = [Net Income + Tax + Interest Expense + any Non-Operating Gains/Losses] x (1 – tax rate)

## NOPAT Example

Suppose a company does not have any debt and has reported an Operating Income of \$20,000 for the year with a tax rate of 27%, the NOPAT is going to be \$14,600, which is computed as \$20,000 x (1 – 0.27).

Another more detailed example for computing NOPAT is if Company ABC has reported net income for the year 2018, 2019 and 2020 as shown below:

 2018 2019 2020 Revenue \$365,000.00 \$425,000.00 \$610,000.00 Cost of Goods Sold \$54,750.00 \$76,500.00 \$122,000.00 Gross Profit \$310,250.00 \$348,500.00 \$488,000.00 General & Admin. Expenses Salaries \$93,075.00 \$121,975.00 \$185,440.00 Rent & Overhead \$37,000.00 \$37,000.00 \$39,000.00 Depreciation & Amortization \$77,562.50 \$82,000.00 \$83,750.00 Total Expenses \$207,637.50 \$240,975.00 \$308,190.00 Operating Income \$102,612.50 \$107,525.00 \$179,810.00 Interest \$10,000.00 \$10,000.00 \$12,500.00 Income Before Tax \$92,612.50 \$97,525.00 \$167,310.00 Taxes (30%) \$27,783.75 \$29,257.50 \$50,193.00 Net Income \$64,828.75 \$68,267.50 \$117,117.00 NOPAT \$71,828.75 \$75,267.50 \$125,867.00 \$102,612.50 x (1 – 0.30) \$107,525 x (1 – 0.30) \$179,810 x (1 – 0.30)

In the above example, if the company does not have any debt, the NOPAT is equal to the Net Income after tax.

Using NOPAT will make the most sense when it is used for companies that belong in the same industry for the reason that industries will have different costs for operating the business.

## Special Considerations

NOPAT is used by analysts to determine the Free Cash Flow to Firm (FCFF) or the Economic Free Cash Flow to Firm.

### Free Cash Flow to Firm

Free Cash Flow to Firm can be computed by adding the NOPAT, non-cash expenses (depreciation and amortization), and then subtracting the change in assets (current assets less current liabilities and CAPEX.

To show that as a formula, it will be:

 NOPAT + Non-Cash Expenses (Depreciation & Amortization) – Change in (Current Assets – Current Liabilities) – CAPEX Free Cash Flow

### Economic Free Cash Flow to Firm

The Economic Free Cash Flow to Firm is computed by subtracting the capital from the NOPAT.

The Free Cash Flow to Firm and Economic Free Cash Flow are both important metrics used by firms to help investors look at companies they wish to acquire because the financing of the company acquiring will replace that of the company that they wish to acquire.

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1. Massachusetts Institute of Technology "Projected, Relevant, Free Cash Flows" Page 1 - 13. December 20, 2021

2. Penn State "After Tax Cash Flow" Page 1 . December 20, 2021