Net Income After Tax (NIAT)

Describes a company's profitability after deducting all necessary taxes

Net income after tax (NIAT) is an accounting term that describes a company's profitability after deducting all necessary taxes. It is the profit of a business after deducting all taxes, expenses, and other liabilities.

Net income after tax is considered the company's bottom line, as found at the bottom of the income statement. It is one of the most important figures to analyze once looking into a company's financial statements.

Put simply; after-tax income is a business's gross income minus taxes. These taxes include federal, provincial, withholding, and state taxes as well as local taxes such as sales and property taxes.

Nevertheless, as a business generates revenues and sales from its products and services, it incurs costs. Once these costs are subtracted, and taxes are paid, the business can know its net income after tax. Keep in mind that revenue leads to net income. "What do you mean by that?"

The income statement consists of many components for calculating the NIAT.

From these components, revenue is the first in line.

In other words, components such as COGS and depreciation are deducted from the revenue leading to net income after tax. Hence, payment is considered the top line, and NIAT is considered the bottom line.

Components for calculation

Calculating the net income after tax involves subtracting the costs and expenses from the revenue generated by the company.

These costs and expenses include the following:

1. Cost of Goods Sold (COGS)

The cost of goods sold represents all direct costs, whether it is direct labor or direct materials, that help produces the product a company is selling. It has different methods of recording, including first-in-first-out and average cost basis.

Understanding COGS helps a company approach its way of production in a more efficient sense.

2. Selling, General, and Administrative Expense (SG&A)

SG&A expenses refer to overhead costs as well as direct and indirect costs. These include costs such as salaries, utilities, insurance payments, accounting costs, rent, commissions, and so on.

3. Depreciation

Depreciation is recorded as an expense on the income statement. This type of expense is a portion of a fixed asset that is considered consumed during its useful life.

4. Interest Expense

Interest expense is the cost of borrowing during a specified period of time. It usually appears under the earnings before interest and taxes (EBIT). Interest expense is accrued and expensed over time.

5. Taxes

The company's taxes include federal, state, provincial, and withholding taxes. It can also include local taxes, as discussed above. These taxes are further subtracted from the net income to get the net income after tax.

Tax Requirements

How to calculate NIAT

Formula

The formula for calculating net income after tax is

AFTER-TAX INCOME = PRE-TAX INCOME - TAXES

Let's say the net income was $100,000 

We will also assume the taxes are 12%

This means that $12,000 would have to be paid in taxes.

This gets you to a total of $88,000 NIAT.

Easy right? Let's take another example that includes all the components we talked about so far:

  1. Revenue $5000
  2. Cost of Goods Sold (COGS) $1000
  3. Selling, General, and Administrative Expense $600
  4. Depreciation $200
  5. Interest Expense $150
  6. Tax $500

Step by step, the NIAT can be attained in the following pattern:

Gross Profit = Revenue - COGS = 5000 - 1000 = $4000

EBITDA = Gross Profit - SG&A = 4000 - 600 = $3400

EBIT = EBITDA - Depreciation = 3400 - 200 = $3200

Pre-Tax Income (Net Income) = EBIT - Interest Expense = 3200 - 150 = $3050

After-Tax Income (NIAT) = Pre-Tax Income - Tax = 3050 - 500 = $2550

Real-world example

Example

Above is the income statement of Amazon according to the company's 10-K filing. Let's take the year 2018 as our example:

  • Revenue is seen at the top of the statement at $232,887 million.
  • The cost of sales (or Cost of Goods Sold) is $139,156 million. To get the gross profit, we subtract revenue from the cost of goods sold to get a total of $93,731 million.
  • Operating profit (EBIT) is then calculated to be $12,421 million after subtracting Selling, general & administrative, research & development, and other operating expenses/income.
  • Pretax profit is highlighted in blue at $11,270 million after subtracting the interest income, interest expense, and other expenses/income.
  • The taxes to be paid, highlighted in yellow, are $1,197 million.
  • Net income, highlighted in red, is therefore calculated to be $10,073 million.
  • Moreover, NIAT has shown to increase for Amazon over the years, with it being $11,588 million in 2019 and $21,331 million in 2020, an 84% increase. An even better jump from $3,033 million in 2017 to $10,073 million, a 232% increase, shows the huge boost in Amazon's numbers and performance.

This can further imply that Amazon's performance in the industry is on an upward trend. Of course, net income isn't the only indicator to entail a company's accomplishments, but it is a great source to cross over once evaluating the performance of a specific company.

Analyzing Net income after tax

Below is the analysis of NIAT: 

a) Why is it important?

It is the most sought-out tool when looking into a company's performance and how it measures against its competitors.

It helps insinuate the company's position in the market by indicating its profitability. This helps the firm decide on its ability to compensate its investors and shareholders by either dividends or share buybacks.

Nonetheless, there are two ways to interpret a company's profitability generally.

These 2 ways include the calculation of return ratios to evaluate how efficient the company is in using its assets and investors' money to generate profits as well as judging profitability relative to the revenues generated.

1. Return on Assets (ROA)

ROA = NET INCOME / TOTAL ASSETS

Return on assets (ROA) is a tool that helps measure how well a company uses its assets to generate its profits and earnings. It is the ratio of Net Income taken from the income statement divided by the total assets taken from the balance sheet for a given time period.

It gives an idea of how efficient the management was towards generating earnings using its assets. In other words, the higher the ROA, the better since the company was able to provide more money with a smaller investment.

2. Return on Equity (ROE)

ROE = NET INCOME / TOTAL EQUITY

Return on equity (ROE) is a tool that helps measure a company's ability to generate profits without needing to utilize debt. It is the ratio of Net Income taken from the income statement divided by the total equity taken from the balance sheet for a given time period.

The higher the company's ROE percentage, the better its ability to efficiently use its shareholder's equity to generate profits.

3. Net Profit Margin

NET PROFIT MARGIN = NET INCOME / REVENUE

Net profit margin measures how effective a company is at generating profit on each dollar of revenue it brings in. It is the ratio of Net income dividend by its revenue generated, both taken from the income statement.

The higher the company's Net profit margin, the better since its efficiency at converting sales into actual profit is better.

Net Profit Margin

b) What if it is negative?

It's best to check out where the company stands in its corporate life cycle.

While a company with a negative or below average NIAT can hint at its poor management quality and its low level of sales along with other factors such as outdated technologies and substandard strategy execution, it could also be because it's still at its growth phase or is still a start-up.

Nevertheless, it's advised not to look into the NIAT of a start-up. Start-ups mostly see years of negative after-tax income at the beginning of their journey.

Hence, investors look into the revenue streams of the start-up to monitor its potential for big profitability in the future and assess its performance in the long run.

c) What can we use it for?

NIAT can be used in many ways. It could be used for reinvesting purposes and paying out dividends.

For reinvestment purposes:

  • It could reinvest its NIAT back into its business if it's doing well and showing positive signs.
  • This is a positive sign for investors looking to delve into this company.

For dividend purposes:

  • It could pay out more dividends to its investors after showing positive signs in performance.
  • Companies that consistently pay dividends appear to be safe and secure.

Key Takeaways

  • NIAT represents the profit of a business after deducting all expenses, liabilities, and taxes.
  • It is referred to as the bottom-line profitability of a company.
  • Revenue is the figure that gets deducted by all components such as costs and expenses, further leading to net income after tax.
  • Companies can use this figure to calculate return on ratios and assess their performance.
  • Start-up companies usually see most of their 1st years in negative figures with NIAT.
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Researched and authored by Jad ShamseddineLinkedIn 

Reviewed and edited by Aditya Salunke I LinkedIn

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