What is NOPAT?

It considers the EBIT (Earnings before interest and taxes) and then deducts the adjustable tax amount. For example, let’s say that EBIT is $40,000, and the adjustable tax is $8,000. Then the Net Operating Profit After Taxes would be = $(40,000 – 8,000) = $32,000.

NOPAT Formula

The net operating profit after tax formula measures the company’s performance from its core operations after taking into consideration the applicable taxes and is calculated by multiplying the one minus tax rate by the company’s operating income.

Mathematically, the net operating profit after tax formula is represented as below,

NOPAT Formula = EBIT * (1 – Tax rate)

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Net Operating Profit After Tax Formula is also known as Net Operating Profit less adjusted Taxes (NOPLAT). It is to be noted that the formula for NOPAT doesn’t include the one-time losses or charges. As such, it is a good representation of a company’s operating profitability.

Steps to Calculate NOPAT

Examples of NOPAT

Let’s see some simple to advanced examples to understand them better.

  • Firstly, the EBIT of the company is determined based on information available in the income statement. EBIT is calculated by deducting the cost of goods sold and operating expenses from the company’s total revenue. EBIT = Total revenue – Cost of goods sold– Operating expenses Now, the company’s tax rate is noted from the company’s annual report. Next, the tax-adjusted value is calculated by subtracting the tax rate from one, i.e. (1 – Tax rate). Finally, the formula for net operating profit after tax is derived by multiplying the EBIT with the value calculated in step 2, as shown above.

EBIT = Total revenue – Cost of goods sold– Operating expenses

Example #1

Let us consider an example for the calculation of NOPAT for a company called PQR Ltd, which is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, the company had generated $150,000 in total revenue and the following expenses.

Now, the operating incomeOperating IncomeOperating Income, also known as EBIT or Recurring Profit, is an important yardstick of profit measurement and reflects the operating performance of the business. It doesn’t take into consideration non-operating gains or losses suffered by businesses, the impact of financial leverage, and tax factors. It is calculated as the difference between Gross Profit and Operating Expenses of the business.read more or EBIT of the company can be calculated as,,

  • EBIT = $150,000 – $70,000 – $25,000= $55,000

Therefore, it can be calculated as,

  • NOPAT = $55,000 * (1 – 20%)

Therefore, the NOPAT of PQR Ltd is $44,000 for the given financial year.

Example #2

Let us take the real-life example of Apple Inc.’s annual report on 2016, 2017, and 2018. Calculate the NOPAT for Apple Inc. based on the following available information:

EBIT

Now, the EBIT of Apple Inc. can be calculated as,

EBIT (in Millions) = Net sales-Cost of sales – Research and development expense – Selling, general and administrative expense

EBIT for Sep 24, 2016

  • =$2,15,639 – $1,31,376 – $10,045 – $14,194=$60,024

EBIT for Sep 30, 2017

  • =$2,29,234 – $1,41,048 – $11,581 – $15,261=$61,344

EBIT for Sep 29, 2018

  • = $265,595 -$163,756 -$14,236 – $16,705= $70,898

Now, the calculation of NOPAT of Apple Inc. for Sep 24, 2016 is as follows,

Calculation of NOPAT for Sep 24, 2016

  • NOPAT Formula = $45,687 * (1 – 35.00%)= $39,016

Calculation for Sep 30, 2017

  • NOPAT = $61,344 * (1 – 35.00%)= $39,874

Calculation of NOPAT for Sep 29, 2018

  • NOPAT = $70,898 * (1 – 24.50%)= $53,527.99 ~ $53,528

Therefore, Apple Inc.’s NOPAT stood at $53,528 Mn for the financial year ended on 29th September 2018.

Nestle NOPAT Calculation

Let’s look at the Income statement of Nestle

Consolidated income statement for the year ended 31st December 2014 & 2015

source: Nestle Annual Report

We have the Net Income now (Profit for the year) and the EBIT (Operating Profit). But to get the adjusted tax rate, we need to calculate the rate.

As the tax rate is not mentioned, we will calculate the rate –

Using this tax rate, we will calculate Net Operating Profit After Taxes for both years.

This is the way you should take into account the income statement information and then calculate NOPAT from the EBIT and adjusted tax rate.

Calculating Net Operating Profit After Taxes for Colgate

Let us now calculate Net Operating Profit After Taxes for Colgate. Below is the Income Statement of Colgate.

source: Colgate SEC Filings

  • We note that the EBIT of Colgate in 2016 was $3,837 million

The EBIT above does contain noncash items like Depreciation and Amortization, Restructuring costsRestructuring CostsRestructuring Cost is the one-time expense incurred by the company in the process of reorganizing its business operations. It is done to improve the long term profitability and working efficiency. This expenditure is treated as the non-operating expenses in the financial statements.read more, etc. However, non-recurring itemsNon-recurring ItemsNon-recurring items are income statement entries that are unusual and unexpected during regular business operations; examples include profits or losses from sale of asset, impairment costs, restructuring costs, and losses in lawsuits, and inventory write-off.read more like restructuring costs need to be adjusted for calculating NOPAT.

Below are Colgate’s restructuring costs from its 10K filings.

  • Colgate’s restructuring charges in 2016 = $228 million

Adjusted EBIT = EBIT + Restrucutring Expenses

  • Adjusted EBIT (2016) =  $3,837 million + $228 million = $4,065 million

Let us now calculate the tax rate required for calculating NOPAT.

We can directly calculate the effective tax ratesCalculate The Effective Tax RatesEffective tax rate determines the average taxation rate for a corporation or an individual. For both, there is a similar formula only with variation in considering variables. The effective tax rate formula for corporation = Total tax expense / EBTread more from the income statement.

Effective Tax rate = Provision for Income Taxes / Income Before income taxes

  • Effective tax rate (2016) = $1,152/$3,738 = 30.82%

NOPAT Formula = Adjusted EBIT x (1-tax rate)

  • NOPAT (2016) = $4,065 million x (1-0.3082) = $2,812 million

Calculator

You can use the following calculator.

Relevance and Use

The formula for net operating profit after tax is a profitability metric that helps assess how a company is operating efficiently, calculated by measuring profit that is adjusted for the costs and tax benefits of debt financing. NOPAT provides such a view that it is not affected by the company’s leverage or the massive bank loan on its books. Such adjustment is essential because these interest payments on debt shrink the net income, which eventually reduces the company’s tax expense. Therefore, the formula for NOPAT helps an analyst view how well the core operations of a company are performing (net of taxesNet Of TaxesThe term “net of taxes” refers to the amount remaining after deducting taxes. Net of taxes = Gross amount – Tax amountread more). It is a profitability calculation measured in terms of dollars and not in percentages like most other financial terms.

However, there remains a limitation of the NOPAT that it is particularly useful when comparing similar companies in the same industry. Since it only measures profit in terms of dollar amount, investors and other financial users usually find it difficult to use this metric to compare differently sized (small & medium enterprise, mid-corporate, and large corporate) companies within an industry.

NOPAT Video

This article has been a guide to NOPAT (Net Operating Profit After Tax) and is the definition. Here we discuss the formula to calculate NOPAT using practical examples & a downloadable excel template. You can learn more about financial analysis from the following articles –

  • Explanation of Cost of Sales FormulaExplanation Of Cost Of Sales FormulaThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read moreHow to Calculate EBITDA?How To Calculate EBITDA?EBITDA is Earnings before interest, tax, depreciation, and amortization. Its formula calculates the company’s profitability derived by adding back interest expense, taxes, depreciation & amortization expense to net income. EBITDA = net income + interest expense + taxes + depreciation & amortization expenseread moreOIBDANet Operating Loss Formula