NOPLAT
A company's income from operations on a pre-interest payment basis
NOPLAT is an acronym for Net Operating Profit Less Adjusted Taxes. It tells us about a company's income from operations on a pre-interest payment basis, i.e., the company pays taxes on its income before interest and taxes.
This measure helps compare two companies with distinct capital structures and tax regimes. Portfolio managers and analysts consider several variables in determining whether to invest in a company or not.
Analysts often use net operating less adjusted taxes to compare companies because companies with negligible debt would not benefit from the tax-saving capacity of interest on the debt that the debt-loaded companies enjoy.
Formula
Net Operating Profits Less Adjusted Taxes = NOPAT + Change in Adjusted Taxes
NOPAT = EBIT * (1 - Tax Rate)
Example
An example of how to calculate net operating income after tax is provided below:
Let's say these are numbers for a company XYZ, whose profit statement is provided above. For the year 2016, Net income = $12,020,000 and
Net operating income after taxes = $13,223,000.
Now, for calculation, it is assumed that 10% of taxes paid each year have been due to deferred taxes; therefore, we add 10% of taxes paid each year to NOPAT.
Therefore, the NOPLAT for year 2016 = NOPAT + 0.1* Taxes paid
Which is equal to $13,223,000 + 380,600 = 13,603,600.
Operating income is the company's operating income, assuming it has no debt (interest expense). After that, we can calculate a hypothetical tax payment by multiplying the tax rate of 24% by the EBIT, i.e., $17,410,000.
Subtracting the hypothetical tax payment from EBIT, we obtain the Net Operating Income After Tax.
While making financial models, analysts use NOPLAT to obtain the unlevered cash flows to be discounted back to get the intrinsic value of the security.
Most often, the enterprise value is used instead of equity value in financial modeling to be able to compare companies with different capital structures. The reason for this is to value a firm based on its assets.
Difference Between NOPLAT and Unlevered Cash Flow
Net Operating Income After Taxes can vary a lot from free cash flows as the former does not account for capital expenses which are cash expenses for the company; it also includes non-cash expenses like depreciation and amortization.
Unlevered Cash Flow = EBITDA − Capital Expenditures − Change in Net Working Capital
It does not account for net changes in working capital such as inventory, accounts payable and receivables, etc. In short, it has the following characteristics:
- It excludes changes in net working capital
- It excludes capital expenditures
1. NOPLAT v/s Net Income
Net operating profit less adjusted taxes would include gain on the sale of fixed assets, interest, and tax expenses; operating profit does not include these three transactions. However, net income would include all revenues and expenses along with the taxes.
2. NOPLAT v/s EBIT
EBIT stands for earnings before interest and taxes, which is different from NOPLAT. Expenses such as interest and tax expenses and gain on the sale of fixed assets are excluded from operating profit.
However, EBIT includes the gain on the sale of fixed assets, thereby making the EBIT greater than the operating profit. When calculating Net Operating Income after Tax, an analyst needs to take into account the tax a company has to pay.
FAQs
It can be calculated by multiplying EBIT by (1- tax rate). It indicates the operating profitability of a company. Also, it does not include sudden or unexpected one-time losses.
NOPLAT Formula = EBIT * (1 – Tax rate)
Free cash flow to the firm (FCFF) is the amount of cash left over for all the investors, i.e., bondholders, equity owners, preferred equity holders, etc. On the other hand, free cash flow to equity (FCFE) is the amount of cash available to equity owners after payment coupons and preferred dividends.
It is a financial tool that provides a measure of a company's profits after adjusting for taxes. It is a better measure to estimate the operational efficiency of a company than EBIT or NOPAT.
The difference between these two profitability measures is that NOPLAT takes into account changes in deferred taxes, whereas NOPAT is NOPLAT without taking into account the adjusted deferred taxes.
Everything You Need To Master DCF Modeling
To Help You Thrive in the Most Prestigious Jobs on Wall Street.
or Want to Sign up with your social account?