NOPAT vs net income
NOPAT is EBIT after tax, before interest. Net income is profit after interest and tax. On the ROIC teaching sheet, $100,000,000 of EBIT at 25 percent tax is $75,000,000 of NOPAT. On the ROE sheet, net income is $15,000,000. Those are two firms, not one year.
| NOPAT | Net income | |
|---|---|---|
| Formula | EBIT times (1 minus tax rate). | Profit after interest and tax. |
| Teaching sheet | $75,000,000 of NOPAT on $500,000,000 of invested capital is 15 percent ROIC. | $15,000,000 of net income on $100,000,000 of equity is 15 percent ROE. |
| Interest | Not deducted. The tax is the tax that would be paid if the firm had no debt. | Already deducted. A more borrowed firm can print a smaller net income on the same EBIT. |
| What it funds a ratio of | ROIC, a return on operating capital. Compare with WACC. | ROE, a return on the residual. Compare with the cost of equity. |
| Same 15 percent, more capital or less equity | Keep NOPAT at $75,000,000, raise capital to $750,000,000: ROIC falls to 10 percent. | Keep net income at $15,000,000, cut equity to $75,000,000: ROE rises to 20 percent. |
| Are they one firm | Not on this page. The ROIC sheet is a $500,000,000 capital stock. | Not on this page. The ROE sheet is a $100,000,000 equity residual. Do not mash them. |
On this page
Two 15 percents that are not the same claim
NOPAT is operating profit after tax. On $100,000,000 of EBIT at 25 percent tax it is $75,000,000. Against $500,000,000 of invested capital that is a 15 percent ROIC. Net income is the residual profit. On $15,000,000 against $100,000,000 of equity that is a 15 percent ROE.
The rates matched. The claims did not, and the firms did not. How NOPAT works is . How ROE works is net income over book equity. ROE against ROIC is the two rates. This page is the two numerators, on the two teaching sheets this site has already verified.
The ROIC calculator and the ROE calculator are the working pages.
A recapitalisation moves one and should leave the other still
Cut equity to $75,000,000 and hold net income at $15,000,000: ROE rises to 20 percent. The operations need not have improved. Keep NOPAT at $75,000,000 and raise invested capital to $750,000,000: ROIC falls to 10 percent. Profit after tax did not fall. The capital tied up in the operations did.
Using net income to judge operations is how a recapitalisation looks like a turnaround. Using NOPAT to judge the equity claim is how a well-funded, low-borrowed firm looks worse than a thin, borrowed one with the same EBIT.
NOPAT is also not free cash flow. Capex and working capital have not been taken off. This is educational material, not financial advice.
Worked examples
100 million of EBIT on 500 million of capital
EBIT is $100,000,000, the tax rate is 25 percent, and invested capital is $500,000,000. What is ROIC?
- NOPAT: , so $75,000,000.
- ROIC: , which is 15 percent.
NOPAT is $75,000,000. ROIC is 15 percent.
\$15,000,000 on \$100,000,000 of equity
Net income is $15,000,000. Book equity is $100,000,000. What is ROE?
- ROE is net income over equity: , which is 15 percent.
- The shareholders' book claim earned 15 cents on the dollar this period.
ROE is 15 percent on $15,000,000 of net income and $100,000,000 of equity.
The same NOPAT on more capital
Keep EBIT at $100,000,000 and tax at 25 percent, so NOPAT is still $75,000,000. Invested capital is now $750,000,000. What is ROIC?
- NOPAT is unchanged: $75,000,000.
- ROIC: , which is 10 percent.
ROIC is 10 percent. Profit did not fall. The capital in the denominator rose. NOPAT is still $75,000,000.
The same profit on \$75,000,000 of equity
Keep net income at $15,000,000. Equity is now $75,000,000. What is ROE?
- ROE: , which is 20 percent.
- Profit did not change. The equity slice shrank.
ROE rises to 20 percent on $15,000,000 of net income and $75,000,000 of equity. The operations need not have improved.
Common questions
Can I put both numbers on one firm?
Yes, from one set of accounts, if you have EBIT, tax, interest, net income, invested capital and equity. This page does not, because its two teaching sheets were built as separate examples. Mash them and you have invented a capital structure.
Which one is cash?
Neither. NOPAT is an after-tax operating profit. Net income is an accounting residual. Free cash flow takes capex and working capital off NOPAT.
Which one sits in ROIC?
NOPAT. ROE uses net income. Mixing the numerators is how a 15 percent ROE gets compared with WACC.
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.