In
corporate finance, net operating profit after tax (NOPAT) is a company's after-
tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
operating profit
In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses.
Operating income and ope ...
for all investors, including shareholders and debt holders.
[Moneyterms.co.uk]
NOPAT
/ref> NOPAT is used by analysts and investors as a precise and accurate measurement of profitability to compare a company's financial results across its history and against competitors.Interest Expense
Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. On the income statement, interest expense can represent the cost of borrowing money from banks, bond inve ...
and the effects of other non-operating activities (non-recurring gains and losses) from Net Income to arrive at a value that approximates the value of a firm's annual earnings. NOPAT is precisely calculated as:
NOPAT = ( Net Income - after-tax Non-operating Gains + after-tax Non-operating Losses + after-tax Interest Expense
Interest expense relates to the cost of borrowing money. It is the price that a lender charges a borrower for the use of the lender's money. On the income statement, interest expense can represent the cost of borrowing money from banks, bond inve ...
)
NOPAT doesn’t include one-time losses and other non-recurring charges because they don’t represent the true, ongoing profitability of the business.[ For example, a company may incur acquisition costs that would not be expected to occur in the future. These costs would negatively affect current year earnings, but do not accurately portray the operations of the firm. These costs should be excluded when performing any type of analysis to determine the operating and financial efficiency of a firm or to compare performance against other firms.
For a rough calculation, NOPAT approximates earnings before interest after taxes (EBIAT).][investopedia.com]
NOPAT
/ref>
The rough calculation for NOPAT is: NOPAT = Operating profit
In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses.
Operating income and ope ...
x (1 - Tax
A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...
Rate)Free cash flow
In corporate finance, free cash flow (FCF) or free cash flow to firm (FCFF) is the amount by which a business's operating cash flow exceeds its working capital needs and expenditures on fixed assets (known as capital expenditures). It is that porti ...
.[
]
Numerical example
Financing approach
See also
* Economic value added
*Free cash flow
In corporate finance, free cash flow (FCF) or free cash flow to firm (FCFF) is the amount by which a business's operating cash flow exceeds its working capital needs and expenditures on fixed assets (known as capital expenditures). It is that porti ...
*Financial statement analysis
Financial statement analysis (or just financial analysis) is the process of reviewing and analyzing a company's financial statements to make better economic decisions to earn income in future. These statements include the income statement, balanc ...
References
External sources
*
Corporate finance
Fundamental analysis
Profit
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