# Net Operating Profit After Tax (NOPAT) Definition and Formula

> **Definition**
>
> Net operating profit after tax is a company's profit from its core operations after paying taxes.

## What Is Net Operating Profit After Tax?

Net operating profit after tax (NOPAT) is a profitability measure that shows how well a company performs through its core operations by deducting expenses and taxes. Put simply, it measures a company's profitability after taxes and it has no debt. NOPAT is frequently used in [economic value-added (EVA)](https://www.investopedia.com/terms/e/eva.asp) calculations and is a more accurate look at operating efficiency for leveraged companies. NOPAT does not include the tax savings many companies get because of existing debt.

### Key Takeaways

*   Net operating profit after tax measures the efficiency of a leveraged company's operations.
*   NOPAT excludes tax savings from existing debt and one-time losses or charges.
*   Assuming a company has no debt, NOPAT is the profit left that may be distributed to its shareholders.

![Net Operating Profit After Tax (NOPAT)](https://www.investopedia.com/thmb/BY73IC3C14kJPXZXsXcGMuaf05A=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/Nopat_final-541807dc1fbd4941bee990388abfe928.png)

*— Investopedia / Michela Buttignol*

## Formula and Calculation of Net Operating Profit After Tax (NOPAT)

To calculate NOPAT, you have to determine the operating income or profit. It includes gross profits less operating expenses, which are comprised of [selling, general, and administrative (SG&A) expenses](https://www.investopedia.com/terms/s/sga.asp). These can be things like office supplies.

The NOPAT formula is as follows:

$\begin{aligned} &\text{NOPAT} = \text{Operating Income} \times \left ( 1 - \text{Tax Rate} \right ) \\ &\textbf{where:} \\ &\text{Operating Income} = \text{Gross profits less operating expenses} \\ \end{aligned}$

## Understanding Net Operating Profit After Tax (NOPAT)

NOPAT is a company's potential cash earnings if its [capitalization](https://www.investopedia.com/terms/c/capitalization.asp) were unleveraged. As such, it represents the amount that could be distributed to shareholders if a company didn't have any debt. This means if it had no debt. The figure doesn't include one-time losses or charges; these don't provide a true representation of a company's true profitability.

Some of these charges may include charges relating to a [merger or acquisition](https://www.investopedia.com/terms/m/mergersandacquisitions.asp), which, if considered, don't necessarily show an accurate picture of the company's operations even though they may affect the company's bottom line that year.            

Analysts look at many different measures of performance when assessing a company as an investment. The most commonly used measures of performance are sales and [net income](https://www.investopedia.com/terms/n/netincome.asp) growth. Sales provide a top-line measure of performance, but they do not speak to operating efficiency.

Net income includes operating expenses but also includes tax savings from [debt](https://www.investopedia.com/terms/d/debt.asp). NOPAT is a hybrid calculation that allows analysts to compare company performance without the influence of leverage. In this way, it is a more accurate measure of pure operating [efficiency](https://www.investopedia.com/terms/e/efficiency.asp).

> **Important**
>
> If a company has no debt, its NOPAT is the same as net income after tax.

## Special Considerations

In addition to providing analysts with a measure of core operating efficiency without the influence of debt, mergers, and acquisitions analysts use NOPAT. They use this to calculate [free cash flow to the firm (FCFF)](https://www.investopedia.com/terms/f/freecashflowfirm.asp), which equals NOPAT, minus changes in working capital. They also use it in the calculation of economic FCFF, which equals NOPAT minus capital.

Both measures are primarily used by analysts looking for acquisition targets since the acquirer's financing will replace the current financing arrangement.

Another way to calculate NOPAT is net income plus net after-tax interest expense (or net income plus net interest expense) multiplied by 1, minus the tax rate. Analysts may also look at the business' profitability using [net operating profit less adjusted taxes (NOPLAT)](https://www.investopedia.com/terms/n/noplat.asp).

## Example of NOPAT

If [earnings before interest and taxes (EBIT)](https://www.investopedia.com/terms/e/ebit.asp) is $10,000 and the tax rate is 30%, the net operating profit after tax is 0.7, which equals $7,000 ($10,000 x (1 - 0.3)). This is an approximation of [after-tax cash flows](https://www.investopedia.com/terms/d/discounted-after-tax-cash-flow.asp) without the tax advantage of debt.

When calculating NOPAT, analysts like to compare against similar companies in the same industry, because some industries have higher or lower costs than others.

## Why Is NOPAT Important?

Net operating profit after tax is a key financial metric that indicates the financial health and well-being of companies, allowing investors to analyze whether they are worthy of investment. It can also be considered a clearer way of how a company can manage its profitability if it had no debt.

## Are NOPAT and EBIT the Same Thing?

NOPAT and EBIT are not the same. NOPAT is a metric that measures a company's profitability after deducting a company's taxes. EBIT, on the other hand, takes profitability into account before taxes and interest.

## How Do You Calculate Free Cash Flow?

Free cash flow is cash generated by a company after accounting for its core operating and capital expenses. To calculate FCF, subtract a company's capital expenses from its operating expenses.

## The Bottom Line

Net operating profit after tax measures a company's profitability without debt after taxes. It allows investors and analysts to measure how financially sound a company is and also gives them a way to decide how worthy a company is as a potential investment. As with any metric, it's important to compare companies within the same industry so you get an accurate assessment.

> **Article Sources**
>
> 1.  Intuit Quickbooks. "[NOPAT: What It Is and How to Calculate It](https://quickbooks.intuit.com/r/midsize-business/nopat/)."