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.

Noplat

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:

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

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Researched and authored by Kunal GoelLinkedIn

Reviewed and edited by Aditya Salunke I LinkedIn

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