Term
NOPAT
Net operating profit after tax: EBIT less the tax the company would pay if it had no debt. It shows what the operations themselves earn regardless of financing and underpins ROIC and EVA.
Updated
What it means
NOPAT, net operating profit after tax, is operating profit after tax. It is calculated as EBIT, earnings before interest and taxes, multiplied by one minus the tax rate. With EBIT of 100,000 euros and a 21 % tax rate, NOPAT is 79,000 euros.
The point is that NOPAT shows what the company would earn after tax if it had no debt. Interest is left out and tax is computed on operating profit rather than the actual tax base. This makes companies with different financing comparable.
NOPAT feeds into other value-creation measures. It is divided by invested capital to calculate ROIC, the capital charge is deducted from it for economic value added, and it is the starting point for free cash flow in DCF models.
How it works in practice
When calculating NOPAT it is worth adjusting EBIT for exceptional and one-off items, such as a gain on selling a building or the cost of a lawsuit. Otherwise the measure will not reflect normal operating performance. The same approach is used for adjusted EBITDA.
The tax rate depends on the purpose: the statutory rate when comparing with competitors, the effective rate reflecting permanent differences between accounting and taxable profit when assessing your own company. For Slovak companies the different rates by income level must also be taken into account.
In business valuations and investment planning we prepare NOPAT projections for several years. Comparing them with the cost of capital, the WACC, shows whether growth creates value or merely adds volume without an adequate return.
What to watch out for
A common mistake is confusing NOPAT with net profit from the profit and loss statement. Net profit is after interest and actual tax, so it is lower for companies with loans and unsuitable for comparing the operating performance of companies with different financing structures.
The second mistake is inconsistency: if NOPAT is based on adjusted EBIT, invested capital for ROIC must be measured consistently too, for example including leases. Otherwise the ratios look better than reality.
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