In finance, what you see isn’t always what you get. The NOPAT formula clears away the fog, letting you see a company’s true financial colors.

NOPAT stands for Net Operating Profit After Tax. It’s a way to measure how much money a company of any size is really making from its main business activities. NOPAT focuses on a company’s core operations by including all the costs of doing business, including taxes, but leaving out the effects of debt. This gives a clearer picture of how well the company’s main activities are performing.

Learn how to calculate NOPAT for your business using a simple formula. This article walks through an example, compares NOPAT to other financial metrics, and shares tips on using it effectively.

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What Is NOPAT?

NOPAT is a way to measure how much money a company makes from its core business activities after paying taxes, but before dealing with debt payments.

Think of NOPAT as getting to look inside a company’s piggy bank after it’s paid for all its regular expenses and taxes. It focuses on how well the business is doing at its primary job: making money from selling its products or services. You get a clearer picture of the company’s performance without debt, interest, or investments clouding the image.

NOPAT is helpful because it shows how good a company is at turning its everyday work into profit. This makes it easier to compare different companies on an “apples-to-apples” basis, even when they have different ways of handling debt. It’s especially important for small businesses because it shows how sustainable the business is and if something needs to change.

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How To Calculate NOPAT Using a Formula

To figure out your company’s NOPAT, there’s a simple formula:

NOPAT = Operating Income × (1 – Tax Rate)

Let’s break it down step by step.

1. Find the Operating Income

Operating income is the profit a company makes from its core business operations after operating expenses but before interest and taxes. You can usually find this on your income statement. If it’s not listed, you can calculate it by subtracting operating expenses from revenue:

Operating Income = Revenue – Operating Expenses

Operating expenses include costs like salaries, rent, utilities, and supplies directly related to running a business.

2. Determine the Tax Rate

This is the percentage of income the company pays in taxes. You can find the effective tax rate in your financial reports or calculate it by dividing the total tax paid by the business’s pre-tax income.

3. Calculate NOPAT

Multiply the operating income by (1 – the tax rate). The tax rate is represented as a percentage, and it changes every year. This gives you the final NOPAT figure, which represents the company’s after-tax operating profit.

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NOPAT Calculation Examples

Let’s compare two fictional roofing companies: Sunshine Roofing and Moonlight Roofing. Sunshine has no debt, while Moonlight has taken on loans to expand its business.

Here’s Sunshine Roofing’s current information:

• Revenue: $5,000,000
• Operating Expenses: $4,100,000
• Interest Expenses: $0
• Tax Rate: 22%

And here’s how Moonlight Roofing is doing:

• Revenue: $5,500,000
• Operating Expenses: $4,200,000
• Interest Expenses: $500,000
• Tax Rate: 22%

First, what happens if we look at net income, which is the total profit a company makes after subtracting all expenses?

Sunshine’s Net Income = (Revenue – Operating Expenses – Interest Expenses) × (1 – Tax Rate)

= ($5,000,000 – $4,100,000 – $0) × (1 – 0.22)

= $900,000 × 0.78 = $702,000

Moonlight’s Net Income = (Revenue – Operating Expenses – Interest Expenses) × (1 – Tax Rate)

= ($5,500,000 – $4,200,000 – $500,000) × (1 – Tax Rate)

= $800,000 × 0.78 = $624,000

After factoring in debt payments, it looks like Sunshine comes out on top. But what’s the real story? Let’s follow the above steps to find out.

1. Find the Operating Income

First, you need to find out how much money each company makes from its core business activity: roofing. We do this by subtracting operating expenses from revenue:

Sunshine Operating Income = $5,000,000 – $4,100,000 = $900,000

Moonlight Operating Income = $5,500,000 – $4,200,000 = $1,300,000

Sunshine made $900,000 from its roofing operations, while Moonlight made $1,300,000. Based on Moonlight’s higher revenue and operating income, it seems like it’s stronger than Sunshine when debts are left out of the equation.

2. Determine the Tax Rate

For this example, the tax rate is 22% for both companies.

3. Calculate NOPAT

Finally, use the NOPAT formula to see how much profit each company keeps after paying taxes, but before dealing with debt payments.

Sunshine NOPAT = $900,000 × (1 – 0.22) = $702,000

Moonlight NOPAT = $1,300,000 × (1 – 0.22) = $1,014,000

After taxes, Sunshine keeps $702,000 of its operating profit, while Moonlight keeps $1,014,000. This shows that Moonlight is actually $312,000 more profitable than Sunshine in its core operations, even though it has much more debt.

Moonlight’s net income is lower than its NOPAT because it includes the interest expense from its debt. But NOPAT shows that Moonlight’s core business operations are actually much more profitable than Sunshine’s.

This example shows how NOPAT can reveal a company’s true operating performance regardless of how it’s financed. It helps investors and managers see past the effects of debt to understand how well a company is really doing.

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NOPAT Versus EBIT

EBIT stands for Earnings Before Interest and Taxes. It’s the same thing as operating income, which was used earlier to calculate NOPAT. While NOPAT and EBIT are both ways to measure a company’s performance, they have some key differences.

EBIT (or operating income) shows how much a company earns from its operations before paying interest on debt and income taxes. The main difference is that NOPAT accounts for taxes, while EBIT doesn’t. This means NOPAT gives a more realistic picture of how much money the company keeps from its operations after paying taxes.

Here’s a simple way to think about it:

EBIT (Operating Income) = Revenue – Operating Expenses

NOPAT = EBIT × (1 – Tax Rate)

NOPAT is considered more useful for comparing companies with different tax situations or debt levels. This is because it shows the after-tax operating profit regardless of how a company is financed.

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NOPAT Versus Unlevered Free Cash Flow

Unlevered Free Cash Flow (UFCF) is another important financial measure. It shows how much cash a company would generate from its operations if it had no debt.

UFCF is useful because it helps investors see how much cash a company could potentially distribute to all its investors, including both shareholders and lenders.

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To calculate UFCF from NOPAT, you need to make a few adjustments:

1. Add back non-cash expenses like depreciation and amortization.
2. Subtract any increases in working capital (money tied up in day-to-day operations).
3. Subtract capital expenditures (money spent on long-term assets).

Here’s a simple formula:

UFCF = NOPAT + Depreciation and Amortization – Changes in Working Capital – Capital Expenditures

For example, let’s say a company has the following financial snapshot:

• NOPAT: $1,000,000
• Depreciation and Amortization: $200,000
• Increase in Working Capital: $50,000
• Capital Expenditures: $300,000

Then its UFCF would be:

$1,000,000 + $200,000 – $50,000 – $300,000 = $850,000

UFCF is particularly useful when valuing companies or comparing companies with different capital structures, like different amounts of equity, debt, and preferred stock. It gives a clear picture of the cash-generating power of a business, regardless of how it’s financed.

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3 Tips for Using NOPAT Effectively

Now that you understand what NOPAT is and how to calculate it, let’s explore how it can help you manage your small business. The key insight is that by focusing on your core operations and removing the effects of debt and taxes, NOPAT helps you see your true earning power.

Here are some ways you can use NOPAT to run your small business more successfully:

1. Track Performance Over Time. Use NOPAT to monitor how well your business is doing from year to year. Because it focuses on your core operations, changes in NOPAT can show you if your main business activities are becoming more or less profitable over time.
2. Compare Investments. When you’re considering investing in different companies, NOPAT can help you make more informed decisions. By comparing NOPATs, you can see which companies are more profitable in their core operations, regardless of their debt levels or tax situations.
3. Benchmark Against Competitors. NOPAT makes it easier to compare your business to others in your industry, even if they have different debt levels or tax situations. This can show you how well you’re doing compared to the competition.

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Invoice Simple Tracks Business Expenses With Ease 

You can’t take advantage of powerful financial analysis tools like NOPAT if you’re not staying on top of your expenses.

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