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Net Operating Profit After Tax (NOPAT)

NOPAT Formula, Definition, and Calculation Example with Excel Template

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Net Operating Profit After Tax (NOPAT)

Key Takeaways
  • What does the net operating profit after tax (NOPAT) metric represent?
  • When it comes to unlevered forecasts, why is NOPAT used?
  • For corporate valuation, when is the NOPAT metric used?
  • How does NOPAT differ from other metrics such as EBIT?

NOPAT Concept

NOPAT is an abbreviation that stands for Net Operating Profit After Tax.

Amongst industry practitioners, as well as in academia, NOPAT is frequently used interchangeably with terms such as:

  • “Tax-Effected” EBIT
  • Earnings Before Interest After Taxes (EBIAT)

So how exactly is the tax rate “adjusted”?

Simply put, NOPAT represents a company’s operating profit after removing financing items like interest expense, which directly impacts the taxes paid via the “interest tax shield”.

NOPAT is a measure of profit that assumes that the company did NOT receive tax benefits from holding debt.

NOPAT Formula

NOPAT represents the operating income available to all providers of capital (e.g. debt lenders, equity shareholders).

In particular, NOPAT is a critical step in calculating a company’s available future free cash flows (FCFs), which serve as the foundation of the discounted cash flow analysis method.

The calculation of NOPAT comprises multiplying EBIT by (1 – t), in which “t” refers to the target’s marginal tax rate.

NOPAT Formula 1

EBIT is your gross profit minus the total operating expenses for the period – and the OpEx line item can include items such as depreciation, employee salaries, overhead, and rent.

While for purposes of modeling, the marginal tax rate can be used, the effective tax rate – the actual tax rate paid based on historical data – can also serve as a useful point of reference.

Another formula with a couple of additional steps to calculate NOPAT begins with net income.

NOPAT Formula 2

From net income (“bottom line”), we add back non-operating losses and deduct any non-operating gains, and then add back the impact of interest expense and taxes. In effect, we have gone from net income up to the operating income line item.

Just like the 1st formula, the next step is to multiply by (1 – Tax Rate).

Net income is a metric that accounts for the effects of non-core income / (losses), interest expense, and taxes, which is why we’re removing the impact of those line items from our NOPAT calculation.

In theory, NOPAT should represent the core operating income (EBIT) of a company – taxed after removing the impact of non-operating gains / (losses), debt financing (e.g. “interest tax shield”), and taxes paid.

NOPAT does not include the tax savings many companies may get because of existing debt.

Net operating profit after tax (NOPAT) is a company’s potential cash earnings if its capitalization were unleveraged — that is, if it had no debt.

Excel Template Download

Now, we’re ready to go through an Excel tutorial showing an example calculation of NOPAT. To access the file and follow along, fill out the form linked below:

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NOPAT Example Calculation Steps

To calculate NOPAT, the goal is to net out the impact of estimated taxes from operating income (EBIT) – which results in tax-effected EBIT, or NOPAT.

Let’s get started. First off, we’ll list out the operating assumptions that we’ll be using throughout our example calculation of NOPAT.

Here, we have two companies, Company A and Company B, which share the following financial data:

  • Revenue: $300m
  • Cost of Goods Sold (COGS): $50m
  • Selling, General & Administrative (SG&A): $40m

Until we reach the operating income line, the two companies have identical financials and profit margins.

  • Gross Profit: $250m
  • Operating Profit: $210m

But the financials begin to diverge because of a non-operating expense, interest expense.

While Company A is an all-equity financed company with zero interest expense, Company B has incurred $100m of interest expense, which reduces its taxable income since interest is tax-deductible.

At the pre-tax income line (EBT), we see the following divergence:

  • Company A EBT: $210m
  • Company B EBT: $110m

The source of the $100m difference is the interest expense mentioned earlier – furthermore, the taxes of the two companies vary significantly because of the tax savings associated with interest (i.e. the “interest tax shield”).

At a 35% tax rate, the companies pay the following taxes:

  • Company A Taxes Paid: $74m
  • Company B Taxes Paid: $39m

Here, Company B has benefited from $35m in tax savings ($74m – $39m).

NOPAT Calculation – Simple Approach

Now, we’re ready to calculate NOPAT. In the first approach, we’ll simply multiply EBIT by (1 – Tax Rate).

If we input the relevant data points into our formula, we get the following:

  • NOPAT = EBIT * (1 – Tax Rate)
  • NOPAT = $210m * (1 – 35%)
  • NOPAT = $137m

Note that despite the fact that Company B benefited from the interest tax shield, the NOPAT for both companies is equivalent.

NOPAT 1

NOPAT Calculation – Starting from Net Income

In the second approach, we’ll be starting from net income.

To start, we need to work our way from net income to EBIT, before repeating the same process as the first approach.

  • Company A EBIT = $137m Net Income + $0m Interest Expense + $74m Taxes = $210m
  • Company B EBIT = $72m Net Income + $100m Interest Expense + $39m Taxes = $210m

So for both companies, EBIT comes out to $210, and to calculate the NOPAT we do the following:

  • Company A and B NOPAT = $210m EBIT * (1 – 35% Tax Rate)
  • Company A and B NOPAT = $137m

NOPAT 2

To reiterate from earlier, NOPAT is a metric that ignores the impact of debt financing – more specifically, the interest tax shield is removed.

In closing, we can confirm that under both methods, the NOPAT comes out to $137m – which clearly shows the capital-structure neutrality of the NOPAT metric.

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