Net Operating Profit After Tax (NOPAT)

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Definition

Net Operating Profit After Taxes are a company’s operating earnings after being adjusted for a tax rate. In simpler terms, it is a measure of profit if a company did not receive tax benefits from holding debt. For instance, if two companies were being compared, one with a significant amount of debt (and thus interest payments) and another company that no debt, NOPAT would be a useful to compare its after-tax cash flows.

Let’s two companies both with 550 million in operating earnings, taxed at 35%. Company A has an interest payment of 50 million, while Company B has no interest payment.

Company A’s earnings before tax would be 500M. (550M – 50M Interest Payment)
Company B’s earnings before tax would be 500M.

Company A’s earnings after taxes would be 325M
Company B’s earnings after taxes would be 325M

On this front, both companies look the same.

However, the NOPAT for these companies differ significantly.

Company A’s NOPAT would be 550 * .65 = 357.5M
Company B’s NOPAT would be 500 * .65 = 325M

Hence, NOPAT is equivalent to the net profit for the companies having no debt and thus no interest expense.

Formula

NOPAT = Operating Earnings (1- Tax Rate)

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