Differences Between NOPAT vs Net Income

If you’re an investor, you have two options. You can look at the net income as every investor does, or you can become wise and check both – net income and NOPATNOPATNOPAT, or Net Operating Profit after Tax, is a profitability measure in which a company’s profit is calculated excluding the effect of leverage by assuming that the company has no debt in its capital and, as a result, ignores the interest payments and tax advantages that companies receive by issuing debt in their capital.read more (net operating profit after tax).

  • Net income is calculated by deducting all the expenses incurred during the year (including the non-cash expenses like depreciationNon-cash Expenses Like DepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year.
  • read more and also interests & taxes) from the revenue of the company.NOPAT, on the other hand, is calculated using the operating income.

How a business operates operationally can be described better by NOPAT than by Net Income. Even if there’s a key difference between net income and NOPAT, looking at each of them would give the investors the clarity they need to decide whether to invest in a company or not.

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In this article, we look at the top differences between NOPAT vs. Net Income and why you, as an investor, should care?

NOPAT vs. Net Income Infographics

Here are the top differences between NOPAT vs. Net Income; it’s worth looking at the differences –

Key differences – NOPAT vs. Net Income

There are many differences between the NOPAT vs. Net Income. Let’s have a look –

  • NOPAT is a measure of operational efficiency for investors. If investors know “net income,” they can ascertain NOPAT easily. But if they know NOPAT, to ascertain “net income,” they need to know the interest rate on debt.While calculating NOPAT, interest expenses on debt are not deducted. While ascertaining net income, interest expenses on debt are deducted.NOPAT helps investors make a comparison among firms on operational efficiency. Net income helps investors get a profitability ratio of the firm (but looking at net income doesn’t create value since to find out “net income,” even non-cash expenses like depreciation is also deducted).In NOPAT, the actual income tax expenses are calculated. But in net income, tax expenses get significantly reduced due to the effect of leverage.Looking at one ratio will not offer the investors sufficiency; each investor should look at both NOPAT and net income to get an idea of profitability, actual taxes to be paid, interest expenses on debtInterest Expenses On DebtInterest expense is the amount of interest payable on any borrowings, such as loans, bonds, or other lines of credit, and the costs associated with it are shown on the income statement as interest expense.read more, and the effect of leverage on profitability.Calculating NOPAT is a no-brainer. On the other hand, ascertaining “net income” needs a bit more time and calculation.

NOPAT vs. Net Income (Comparison Table)

Conclusion

As an investor, it’s wise not to become a one-eyed deer. You will gain much more insight into a company when you look at all of the aspects of the profitability of the company. First, you should look at all four financial statementsFinancial StatementsFinancial statements are written reports prepared by a company’s management to present the company’s financial affairs over a given period (quarter, six monthly or yearly). These statements, which include the Balance Sheet, Income Statement, Cash Flows, and Shareholders Equity Statement, must be prepared in accordance with prescribed and standardized accounting standards to ensure uniformity in reporting at all levels.read more. Then you should look at net income, NOPAT, net cash inflow/outflow, net revenue, return on total assets, return on equityReturn On EquityReturn on Equity (ROE) represents financial performance of a company. It is calculated as the net income divided by the shareholders equity. ROE signifies the efficiency in which the company is using assets to make profit.read more, return on capital invested, etc.

Having a look at all of these statements and ratios will give a solid idea about whether to invest in a particular company or not.

NOPAT vs. Net Income Video

This has guided the top differences between NOPAT and Net Income. Here we also discuss the NOPAT and Net Income differences with examples, infographics, and comparison tables. You may also have a look at the following articles for gaining further knowledge in Accounting –

  • Revenue vs. Net IncomeCalculate Net IncomeWindfall ProfitOperating Income vs. Net Income