NOPAT Vs. Net IncomeDifferences You Need to Know Between the Two!

Written By:
Lisa Borga

NOPAT is a company’s net operating profit after taxes and is a useful metric for looking at the operating efficiency of a company’s core operations without considering debt.

In contrast, net income is a company’s profit once all deductions and expenses are subtracted from its total revenue.

NOPAT

NOPAT is a good way for investors to evaluate whether or not a business is operating efficiently.

This is computed by measuring the business’s profits after operating expenses and taxes are considered.

However, NOPAT does not consider the company’s leverage or any large bank loans it may have.

This is important since the interest payments on these loans would lower the company’s net income, and this would reduce the company’s taxes.

Because of this, NOPAT makes it easier for investors to see how well the company is performing at its core operations.

There are some limits to the usefulness of this metric. It is useful if investors want to compare companies in the same industry.

But, because it looks at a profit only in terms of dollars, it may be less useful for investors who want to compare businesses of different sizes or in different industries.

Net Income

net income

Net income is one of the most important financial metrics, and it is used by investors and analysts to determine the profit earned by a business.

It allows investors to see the amount by which a company’s total revenue exceeds its expenses.

However, it is not as useful for looking at a company’s operational efficiency since it can be affected by how a company is leveraged or the amount of debt it has.

Calculating Net Income and NOPAT

NOPAT and net income are both key metrics an investor can look at to better evaluate a company before investing in it.

NOPAT can be calculated using the following formula.  

NOPAT = Operating Income × (1−Tax Rate)

Where:

Operating Income = Gross profits – Operating Expenses 

Net income can be calculated by taking the total revenue of the company and subtracting all of its operating costs and expenses to determine the business’s pre-tax earnings.

Then, deduct taxes from this figure to obtain net income.

Here is the formula.

Net Income Formula = Total Revenues – Total Expenses

Comparison of NOPAT and Net Income

BasisNOPATNet Income
MeaningThe term NOPAT stands for Net Operating Profit After Tax.Net income is the profit a company earns during the fiscal year.
UsesNOPAT can be used to help analyze a company’s operational efficiency without considering leverage.Net Income is used to measure a business’s profitability.
FormulaNOPAT = Operating Income x (1 – Tax Rate)Net Income

Formula

Total Revenues – Total Expenses

UsersInvestorsExternal stakeholders, investors, and stockholders
RelevanceNOPAT is useful for comparing two different companies based on operational efficiency.Net income is useful for analyzing a business’s overall performance.

Final Thoughts

Net Income is very useful for looking at how profitable a company is.

It also has the advantage of being easy for shareholders and investors to understand.

But, NOPAT can allow investors to see the income that is coming from operations without the effects of debt. It is also more useful for comparing the performance of two different companies in the same industry.

However, instead of looking at just one of these metrics, investors should look at both metrics before making an investment decision.

Key Takeaways

  • NOPAT is a metric that allows investors to see how well a company is performing financially in its core business operations after taxes. NOPAT is easy for an investor to calculate if an investor knows the business’s net income. However, the reverse is not true. If an investor knows a business’s NOPAT, they must also have the interest rate on its debt to calculate net income.
  • If an investor wants to calculate net income, they will need to deduct interest expenses on debt. In contrast, when calculating NOPAT, investors will not deduct interest expenses on debt.
  • Investors can use NOPAT to compare the operational efficiency of different companies. Whereas, they can use net income to help calculate the profitability ratio of different companies.
  • When calculating NOPAT, the company’s actual income tax expenses are considered. In contrast, when calculating net income, tax expenses may be reduced as a result of leverage.
  • Investors should look at both net income and NOPAT to get a better idea of a company’s profitability.

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  1. UNC Greensboro "CASH FLOWS" Page 1 . August 19, 2022

  2. Cornell Law School "Definition of net income and proceeds and standard for allocating net income or proceeds to various periods." Page 1 . August 19, 2022