NOPAT calculator is used to estimating the company’s operational efficiency. If you are interested in what a NOPAT calculator is, you are at the right place to find out. How to calculate the net operating profit after tax with clearly explained examples and the benefits and less you can find out through this article.

What is NOPAT – Net Operating Profit After Tax? NOPAT definition

NOPAT is the net operating profit after tax, calculated by subtracting operating expenses from revenue. It is the amount of money the company has left over after paying its costs. It is a fundamental metric for measuring the profitability of a company. If the company has a high NOPAT, it generates a lot of cash. If the company has a low NOPAT, it is not generating much cash. We use NOPAT in our financial statements to determine how much cash is available for investment.

The term NOPAT stands for Net Operating Profit After Taxes. It is an essential measure of a company’s financial health because it measures how much cash to reinvest in the company or payout to shareholders. We can also say that NOPAT is a more accurate review of operational efficiency for companies with influence and does not include the tax savings that many companies receive due to emerging debt.

Understanding Net Operating Profit After Tax (NOPAT)

Net operating profit after tax shows us how well the company has performed, tax-free through its core operations. The figure does not include one-off costs or losses. It is impossible to determine the actual presentation of its profitability. Some of these fees include merger or acquisition costs, which, if taken into account, do not necessarily reflect the accurate picture of the company’s business. However, they may impact the company’s value in that year.

Analysts implement various measures of the company’s success when they evaluate it as an investment. The most commonly used performance measures are net revenue and sales growth. Sales provide an adequate performance standard but do not talk about operational efficiency. Net income includes operating expenses but also provides tax savings on debt. A hybrid budget that allows analysts to compare a company’s performance without action is net operating profit after tax. It means a measure of pure operational efficiency is more accurate.

We can take the example of 2 companies and compare their success in the balance sheet. For instance, one company received a loan of 100 million to stimulate business and growth. Another company brings only 1 million dollars. From this example, we can see a big difference, and this difference in their structure makes comparison difficult. Although the first company received a more significant amount, it can achieve higher sales volume and net income, these values ​​do not truly reflect whether it is doing well. While comparing the net income of the two companies can give tax relief that companies receive by allocating debt in equity.

How to calculate NOPAT?

NOPAT cash flow is the net profit before tax, depreciation, and amortization, minus capital expenditures. It is calculated by taking the net income and adding the depreciation and amortization. NOPAT cash flow is a financial metric used to measure the profitability of a company. This financial metric is essential to monitor because it can help investors see how much profit a company is generating on an annual basis.

When we multiply the company’s income with one minus tax rate, we get NOPAT.

The income tax rate or effective tax rate is the percentage of a company’s reenue in taxes. We calculate the tax rate from the income statement to divide the total tax costs with the company’s earnings before taxes.

Tax rate = total tax : earning before tax

Operating income or operating profit measures the company’s profit, but interest and taxes are not part of the calculation. It does not consider the effect of taxation on profitability, although it speaks about its operational efficiency. There are two ways to calculate operating income:

a) Operating income = Gross profit – Operating expense

b) Operating income = Net income + Non-operating income – Non-operating income gain + Interest expense + Tax           

NOPAT formula

You can use NOPAT cash flow to assess the value of a company and its growth potential. Meanwhile, it is important to note that this metric does not account for debt financing, as it only looks at the profits generated by the company’s operations.

Also, you can calculate with our NOPAT calculator in two ways. The first formula is an estimation formula and more straightforward, while the second formula is much more complex and precise. Therefore, you have NOPAT.

The first NOPAT formula used by companies looks like this:

NOPAT = O_{i} \cdot (1-T_{r})

Oi – Operating income
Tr – Tax rate

You can calculate the company’s operating income by subtracting gross profit from operating costs and use this formula to know our operating income and tax rates.

Also, you can use the second NOPAT formula:

NOPAT = \left ( N_{i}+I_{l}-I_{g}+In_{e}+T_{e} \right ) \cdot (1-T_{r})

Ni – Net income
Il – Non-operating income loss
Ig – Non-operating income gain
Ine – Interest expense
Te – Tax expense
Tr – Tax rate

To find how much the company earns before deducting taxes and interest, use the formula. But firstly, you need to calculate the net income:

Net income = Operating expense – Total income

You need to calculate the loss of non-operating income that includes losses such as selling products at a lower price that are defective. Non-operating income shows how much the company earns from non-business activities.

In adittion, the interest expense is calculated (Interest expense = profit before tax – Net profit), while the tax point is equal to profit before tax multiplied with the tax rate.

Net income vs NOPAT

Most crucial difference between NOPAT and Net income is that NOPAT refers to net operating profit after tax and calculates net operating earnings before interest deduction but after-tax deduction to determine the actual efficiency work.

However, net income company’s operating profit in the period of operation after considering all costs incurred in that period of the process.

You can find the difference between these two terms in next NOPAT vs. Net Income – Comparison Table.

NOPAT NET INCOME
Calculations are based on operating income to determine the company’s operational efficiency. Net income is obtained by deducting all expenses from income.
You can use NOPAT to understand leverage-free operational efficiency. Net income is the company’s profitability.
Use NOPAT to compare performance between two or more companies.You can use the Net income to assess the overall performance of companies.
You can use NOPAT to calculate actual income tax costs. You can significantly reduce expenses due to the leverage effect.
Specifically valuable for Investors. Specifically beneficial for shareholders, investors, and external stakeholders.
NOPAT vs. Net Income – Comparison Table

NOPAT calculation examples

To illustrate this, here is the example that will show you how to calculate with our NOPAT calculator.

Suppose you have an operating income of $ 100,000 and a tax rate of 30%.
You can calculate the NOPAT using the formula above:

NOPAT = O_{i} \cdot (1-T_{r}) NOPAT = 100,000.00 \cdot (1-0.3) = 70,000

Here is one more example below. You can see a NOPAT calculation in this table.

Net income$130,000
Cost of Goods$50,000
Labor costs$30,000
Administrative costs$15,000
Total net profit$95,000
Interest expense$15,000
Profit before tax$80,000
Tax rate40%
Tax expense$32,000
NOPAT$106,200
NOPAT example

Using data from the table above, and NOPAT formula, you can calculate next:

NOPAT = 130,000.00 + 15,000.00 + 32,000.00 \cdot (1-0.4) = 177,000.00 \cdot 0.6 = 106,200.00

Advantages and Limitations to using NOPAT

With the NOPAT calculator, you can calculate business cash flow based on actual values (income, operating gains/losses, and tax rate). It allows NOPAT to measure your exact value much easier and faster than competitors. On the other hand, the comparison is not so precise.

This calculator can show the company’s business by calculating net income after adding taxes. It considers debt that leads to high-interest costs. With this calculator, you can discover the efficiency of a business that can sometimes be miserable if only revenue is analyzed.

Equally important is that the NOPAT formula regulates companies from related industries. It does not consider the individual growth stages in which you can find these companies. These company’s stages of growth can affect a company’s business.

Unfortunately, it is not possible to measure the level of risk that the company is taking, using the NOPAT calculator. The company’s invested capital is not part of the calculation. But, if the company invests more capital, it will be at a higher risk. On the other hand, if the company invests less money, it will be at a lower risk.