NOPAT is an economic principle that measures a company’s net operating profit after taxes have been deducted for all investors, shareholders and debt holders/ providing companies with a more realistic value of the company.
The NOPAT formula is:
Operating profit * (1- Tax Rate)
Alternatively, you can use this as a NOPAT calculation:
Net Profit - Tax + Post Tax Interest Expense – After tax interest income
The NOPAT formulas above both demonstrate the adjustment needed in order to calculate the after-tax profit. If a company does not have any outstanding debt and does not pay interest on any loans, then the company’s NOPAT would be the same number as the company’s net profits.
NOPAT is an acronym and an accepted financial term that stands for Net Operating Profit After Taxes. As a measurement of actual profit, the calculation of NOPAT is required to determine actual cash flow after taxes, which is more accurate in terms of understanding actual cash flow and opportunity cost. The calculations require certain adjustments that allow managers to interpret the company’s income statement information into cash flow profits.
NOPAT vs Net Income
To determine the NOPAT formula for any given company, calculations must first be done to determine EBIT (earnings before interest payments and taxes). EBIT is the starting point for calculating NOPAT. Adjustments are then made to EBIT by identifying which expenses are actually investments and by subtracting taxes.
Once you’ve completed the NOPAT calculation, it can then be used to calculate EVA, which stands for “Economic Value Added.” The term, coined by Stern Stewart & Co., was designed to help corporations gain a clearer picture on how to maximize profits in ways that benefit shareholders most, instead of just having the unclear goal of maximizing profits in general. The goal of EVA is to allow corporations to have better decision-making capacities and a better picture of the economic viability and health of the company rather than just the “paper value.”
EVA is an accounting-based principle that is more a thought and goal process than a calculation, assisting corporations in achieving improved transparency and designed to help avoid fiscal crisis. The true necessity of NOPAT and EVA is understanding opportunity cost, because a corporation’s capital can only be used by a single department within the organization. By measuring whether or not the department using the specified capital is getting the highest rate of return, corporations can easily determine which divisions are contributing more favorably to the company.
EVA is calculated through the following steps:
- Calculate net operating profit after tax (NOPAT)
- Calculate total invested capital (TC)
- Calculate weighted average cost of capital (WACC)
- Calculate EVA: NOPAT - (TC * WACC)