NOPAT: How to calculate net operating profit after tax

How profitable are your core business operations? Unlike net income, which includes various non-operating expenses and incomes, net operating profit after tax (NOPAT) isolates the profits you generate strictly from business operations, providing a clearer view of operational efficiency. 

NOPAT is vital for understanding your company’s operating performance. 

NOPAT paints a more accurate picture of your company's performance in its daily activities and helps you evaluate your operational efficiency and make better decisions about your future. Let’s look at how to calculate NOPAT, how to use it in a financial analysis, and more.

How do you calculate net operating profit after tax (NOPAT)?

You can calculate NOPAT with data you can find on your company’s income statement. The goal is to figure out your net operating profit after tax that has been applied to your operating income, excluding interest expenses. You only want to focus on the profits generated from core business operations. 

There are several ways to calculate NOPAT, depending on how much detail you need. There’s a simple and a long formula.

Simple NOPAT Formula

You can use the simple NOPAT formula when you know your operating income and tax rate. Just subtract your gross profit from operating expenses to get your operating income:

NOPAT = Operating income x (1 - tax rate)

 The tax rate is the percentage of income your business pays in taxes. For example, if your operating income is $100,000 and your tax rate is 21%, then:

NOPAT = $100,000 x (1 - 0.21)

NOPAT = $79,000

Long NOPAT Formula

This formula is more complex. You use this formula when you’re unsure how much income you’ve made solely from operations.

NOPAT = (Net income + non-operating income loss - non-operating income gain + interest expense + tax expense) x (1 - tax rate)

Don’t worry, solving this equation is easier than it looks. Here’s how to fill numbers in with each of these equations:

1. Solve for net income. Net income = Total revenue - All expenses
2. Non-operating income loss results from investment losses or other losses outside the core business activities
3. Non-operating income gain includes anything your business earns from investing and other non-operating-related activities
4. Interest expense can be found on the income statement
5. Tax expense can also be found on the income statement, or you can calculate it if you know net income before taxes and the tax rate. Tax expense = Net income before tax x Tax rate

For example, let’s say you’re finishing up a project and have the following information:

• Total revenue: $1,000,000
• Cost of goods sold (COGS) = $400,000 
• Operating expenses = $200,000 
• Non-operating income loss = $30,000
• Non-operating income gain = $20,000
• Interest expense = $50,000
• Tax expense = $68,000
• Tax rate = 20%

First, we’ll solve for net income. In this case, your total revenue is $1,000,000, and your operating costs include COGS ($400,000), operating expenses ($200,000), interest expenses ($50,000), and tax expenses ($40,000):

Net income = $1,000,000 - $400,000 - $200,000 - $30,000 - $20,000 - $50,000 - $68,000 = $272,000

Now that you have net income as your starting point, let's look at what else you know. Non-operating income loss is $30,000 and non-operating income gain is $20,000. Interest expense is $50,000 and tax expense is $68,000.

Now, you have all of the information needed to determine your NOPAT. Once you plug all of the numbers into the long NOPAT formula above, you get: 

NOPAT = ($272,000 + $30,000 - $20,000 + $50,000 + $68,000) x (1 - 0.20)

NOPAT = ($400,000) x (1 - 0.20)

NOPAT = $320,000

Income statement assumptions

To calculate NOPAT correctly, you must understand the assumptions based on your business’s income statement. These include:

• Revenue: Your revenue is the total income generated from sales and services before deducting any costs or expenses. It serves as the starting point for calculating operating income. 
• Costs of goods sold (COGS): COGS are the direct costs associated with producing goods or services, like labor and materials. Subtracting COGS from revenue gives you your gross profit. 
• Selling, general, and administrative expenses (SG&A): SG&A includes overhead costs like rent, salaries, and marketing materials. Deducting these expenses from your gross profit will help determine your operating income. 

To calculate your NOPAT, you must account for your revenue, COGS, and SG&A. These figures are essential for understanding the true profitability of your core operations.

NOPAT calculation example

Here’s another example of how to calculate NOPAT using the short-form formula. As a refresher, here’s your net operating profit formula:

NOPAT = Operating income x (1 - tax rate)

First, you must determine your operating income. Let’s say your company’s revenue is $500,000, your COGS are $200,000, and SG&A expenses are $150,000. 

Operating income = Revenue ($500,000) - COGS ($200,000) - SG&A ($150,000)

Operating income = $150,000

Next, let’s apply a tax rate of 25%. 

NOPAT = $150,000 x (1 - 0.25)

NOPAT = $112,500

In this example, your NOPAT is $112,500. In other words, your business generates $112,500 in profit from its core operations after taxes.

 NOPAT vs. net income

While NOPAT focuses solely on operational profits, net income accounts for all aspects of your business, including interest expenses and taxes. Net income also includes one-time items, which can sometimes distort your view of operational performance.

Here’s why it matters: If your company has substantial debt, its net income may be lower due to high-interest expenses. NOPAT excludes these expenses, providing you with a clearer measure of how well the company’s core operations are performing.

NOPAT vs. unlevered free cash flow

Unlevered free cash flow (UFCF) refers to the cash a company generates before calculating interest payments. Like NOPAT, UFCF excludes how debt impacts your core operations. However, UFCF also accounts for changes in your net working capital, non-cash expenses, and capital expenditures, offering a more comprehensive view of your company’s financial health. 

UFCF paints a broader picture of the cash available in your company, highlighting your ability to fund operations, pay dividends, or invest in growth. Whichever formula you use all depends on what you’re looking for. 

How to use NOPAT in financial analysis

NOPAT is a key financial metric in financial analysis, especially when assessing the value of a business or its projects. It also plays a vital role in analyzing discounted cash flow (DCF), where future cash flows are discounted to determine the present value of a business. Using NOPAT in DCF analysis provides you with a more accurate estimate of a company’s value based on its operational earnings after taxes. 

NOPAT is also helpful when benchmarking a business’s performance against competitors or industry standards. Comparing NOPAT across different periods allows you to identify trends, assess the effectiveness of your cost management strategies, and make better decisions about future investments.

Navigate midsize business challenges and opportunities

NOPAT is a useful metric, especially when considering ways to improve your midsize or enterprise business’s financial performance. By regularly analyzing your NOPAT, you can make data-driven decisions that lead to improved efficiency and long-term success. 

When navigating your finances and for more insights and tools to help manage your business, look for advanced accounting software that builds in profitability analysis like QuickBooks Advanced. 

To take your business to the next level, use enterprise accounting software like Intuit Enterprise Suite, to boost productivity with business and financial management in one solution.