NOPAT calculator
By Jude Wallis
NOPAT is net operating profit after tax: operating profit taxed, but before any financing cost. $100,000 of EBIT at a 21 percent tax rate gives $21,000 of tax and $79,000 of NOPAT.
NOPAT
$79,000.00
EBIT after 21% tax, with no interest in the subtraction.
- Tax on EBIT
- $21,000.00
- NOPAT
- $79,000.00
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The formula
EBIT is earnings before interest and tax, and is the tax rate as a decimal. Interest never enters, which is what makes the result independent of how the business is financed.
Interest is deliberately absent
NOPAT asks what the operations earn after tax, as if the company had no debt at all. Two companies with identical operations and different borrowing report different net income and the same NOPAT, which is exactly the point: it lets the operating businesses be compared without the financing decision in the way.
That is also why the tax figure here is a construct. $21,000 is the tax the operations would carry standing alone, not the tax on the actual return, which would be lower because interest is deductible.
What NOPAT feeds
It is the numerator of return on invested capital, and the starting point of unlevered free cash flow in a discounted cash flow model. Both are built to be independent of financing, and both would break if net income were used instead.
The ROIC calculator divides this $79,000 by invested capital, and the free cash flow calculator adds depreciation back and takes capital spending out.
Which tax rate to use
The marginal rate is the usual choice for forward looking work, because it is the rate the next dollar of profit would face. An effective rate taken from the accounts describes what actually happened, including one off items, and is the better choice when explaining a past period.
The second example uses 25 percent on $200,000 of EBIT, giving $50,000 of tax and $150,000 of NOPAT. Changing the rate changes the answer proportionally, so it is worth stating which rate a published NOPAT used.
What the measure covers
One period of operating profit at one tax rate. It sits between EBIT and free cash flow, and it is the cleanest way to compare the profitability of operations across companies with different capital structures. How NOPAT works covers its place in valuation, and free cash flow is the step after. This is educational material, not financial advice.
Worked examples
\$100,000 of EBIT at 21 percent
Operating profit is $100,000 and the tax rate is 21 percent. What is NOPAT?
- Tax on operating profit: .
- NOPAT: .
Tax is $21,000 and NOPAT is $79,000 on $100,000 of EBIT.
Twice the profit at a higher rate
EBIT is $200,000 and the tax rate is 25 percent.
- Tax: .
- NOPAT: .
Tax is $50,000 and NOPAT is $150,000. Twice the EBIT of the first case, less than twice the NOPAT, because the rate is higher.
Using net income instead of EBIT
Net income already has interest taken out, so taxing it again produces a number that depends on the debt load rather than on the operations. NOPAT starts at $100,000 of EBIT precisely so that the $79,000 result is the same whatever the financing.
Common questions
Why not just use net income?
Because net income includes interest, so it mixes operating performance with financing decisions.
Is the tax figure the real tax bill?
No. It is the tax the operations would carry with no debt, which is what makes NOPAT comparable across companies.
Is this financial advice?
No. It is educational material for the operating profit after tax identity.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.