NOPAT: Definition & Formula

What is NOPAT?

NOPAT stands for Net Operating Profit After Taxes. NOPAT is a measure of a company’s net profit if its debt structure– and, therefore, interest expense– is ignored. It represents the theoretical earnings a company could achieve if it had no debt. NOPAT is used as a supplementary earnings figure to compare companies within an industry without consideration for their capital structure.

NOPAT allows financial statement users to compare highly leveraged companies and companies with little to no leverage based only on the impact and efficiency of their operations. Leverage refers to the company’s specific mix of debt and equity financing. Highly leveraged companies have a greater amount of debt financing compared to equity financing. This means their interest expense will be much higher on the income statement. 

Where Does NOPAT Appear on the Financial Statements?

NOPAT is not an income figure that will appear on a company’s income statement. It is a supplementary earnings figure that can be calculated using information that is presented on the income statement. In order to calculate NOPAT, you will need the following items from the company’s income statement:

• Operating income
• Net income
• Taxes
• Interest
• Non-operating gains or losses

NOPAT Formula

The formula for NOPAT can be calculated from the bottom up or top down, depending on what earnings information you have available. 

The more complicated bottom-up NOPAT formula is:

NOPAT = (Net Income + Taxes + Interest + Non-Operating Gains / Losses) x (1 - Tax Rate)

Or, the more simplified top-down version is:

NOPAT = Operating Income x (1 - Tax Rate)

NOPAT Example

Here is a comparison of two different companies. ABC Company is highly leveraged and has $250,000 of interest expense in the current year. XYZ Company only has $30,000 of interest expense. Their net incomes are $70,000 and $94,500, respectively. However, a potential investor wants to look at both of their earnings from operations without the impact of their debt structure. Here are the two companies’ income statements and calculation of NOPAT.

NOPAT is calculated by multiplying operating income by 70% – or 1 minus the 30% tax rate. 

ABC Company NOPAT = $350,000 x (1 - 0.30) = $245,000

Where:

• $350,000 = operating income
• 0.30 = 30% tax rate

XYZ Company NOPAT = $165,000 x (1 - 0.30) = $115,500

Where:

• $165,000 = operating income
• 0.30 = 30% tax rate

ABC Company has a smaller net income figure of $70,000 versus $94,500 for XYZ Company. However, when calculating NOPAT, ABC Company’s earnings figure is much higher– $245,000 versus $115,500. This is because ABC is more highly leveraged and has significantly more interest expense in the current year. 

When the negative effect of its debt leverage is removed from the equation, its earnings figure is higher.

NOPAT vs Net Income

Both NOPAT and net income are measures of a company’s earnings and profitability. Unlike net income, NOPAT is not an official earnings figure and is not reported on an income statement. Net income is the bottom line of a company’s income statement. It represents the earnings of a company in a specific accounting period after all expenses have been accounted for– including interest. NOPAT disregards the impact of interest expense, including its tax impact. 

NOPAT vs EBIT

EBIT stands for earnings before interest and taxes. NOPAT and EBIT are similar because they both disregard the impact of interest. However, EBIT also removes taxes from the equation. EBIT is not a generally accepted accounting principles (GAAP) earnings measure, so it is also not reported on an income statement. The main difference between NOPAT and EBIT is that NOPAT includes the impact of taxes on operating income. 

NOPAT vs EBITDA

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. NOPAT and EBITDA are both earnings figures that can be used to compare companies. The major difference is that NOPAT includes the impact of depreciation, amortization, and taxes on operating income. EBITDA also attempts to compare only the operational efficiency of multiple companies within an industry, but it takes the analysis a step further by disregarding the impact of depreciation and amortization expense.

NOPAT vs FCFF

NOPAT is the starting point to calculating free cash flow to the firm (FCFF) – also known as unlevered free cash flow. Free cash flow to the firm represents the cash flow that is available to both equity shareholders and debt financiers as a result of the company’s core operations. Free cash flow to the firm is a performance metric used in analysis prior to acquisitions because the potential acquirer’s financing will replace the current financing of the company. 

The formula for FCFF is:

FCFF = NOPAT + D&A - Net Change in NWC - CapEx

Where: 

• FCFF = free cash flow to the firm
• NOPAT = net operating profit after taxes
• D&A = depreciation and amortization
• Net change in NWC = net change in net working capital
• CapEx = capital expenditures

Why is NOPAT Used to Compare Companies?

NOPAT is used as a supplemental earnings figure to compare companies within an industry without regard to their use of debt financing. It allows the financial statement user to see the impact of the day-to-day operations of the business. 

NOPAT also disregards the impact of any one-time gains or losses such as a lawsuit settlement or insurance payout. These items can skew the net income of a company in a given year, and removing them allows the financial statement user to better compare the actual operational results of two companies within the same industry. 

Additional Resources

If you found this article useful, consider checking out our Financial Accounting Essentials where you'll learn how to build a balance sheet, income statement, and cash flow statement from scratch based on a set of transactions. You'll also learn to find, read, and analyze the financial statements of real companies such as Microsoft and PepsiCo. Students who have taken this course have gone on to work at Barclays, Bloomberg, Goldman Sachs, EY, and many other prestigious companies. Get started now!

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