What it means
Reported net income mixes together the results of running the business and the effects of how it is financed. A company with a lot of debt pays interest, which reduces profit, while a similar company funded by shareholders does not.
NOPLAT removes that difference by starting from operating profit before interest and applying tax as though the company had no borrowings. The word "adjusted" in the name is important.
The tax charge used is not simply the tax in the accounts, but the tax the company would pay on its operating profit alone. That usually means taking the tax shown in the income statement and removing the benefit of the tax deduction on interest, and adjusting for other items that are not part of core operations.
NOPLAT is a key building block in value-based management. It is the numerator in return on invested capital, which compares operating profit after tax with the capital tied up in the business.
It is also the starting point for free cash flow in a discounted cash flow valuation, where NOPLAT plus depreciation, minus investment, gives the cash available to all investors. For managers, NOPLAT is a more honest measure of operating performance than net income.
It ignores one-off gains from financial investments, avoids rewarding a business just because it borrowed less, and shows whether the core business generates value above its cost of capital. A simple version is often used in practice: operating profit multiplied by one minus the tax rate.
More detailed versions adjust for items such as operating leases, pension costs and provisions, so that the figure reflects the underlying economics. When comparing NOPLAT across firms, make sure each calculation uses the same definition.
Differences in lease treatment or in what counts as operating can distort the comparison.
In practice
Real-world examples.
Example
A manufacturer with $5,000,000 of EBIT and a 24% tax rate calculates NOPLAT of $5,000,000 x 0.76 = $3,800,000. It compares this with a rival that has much more debt, and sees the two earn similar operating returns even though their net incomes differ. The comparison helps the manufacturer's board see that its borrowing, and not its operations, explains the gap.
Example
An investor analysing a retail chain uses NOPLAT of $12,000,000 as the starting point for a cash flow model. She then adds depreciation and subtracts new investment to estimate free cash flow. The result is then discounted at the company's cost of capital to produce a value for the whole business.
Example
A private equity firm considering a $60,000,000 purchase finds that the target earns NOPLAT of $6,000,000. The 10% return on price helps it judge whether the business can support its planned borrowing. The firm also checks how fast NOPLAT would need to grow to justify the price.
Formula
Calculation
NOPLAT = EBIT x (1 - Operating tax rate)
A company has earnings before interest and tax (EBIT) of $2,000,000. The operating tax rate in this illustration is an assumed 25%. NOPLAT = $2,000,000 x (1 - 0.25) = $2,000,000 x 0.75 = $1,500,000. If the company has $10,000,000 of invested capital, its return on invested capital is $1,500,000 / $10,000,000 = 15%. If its cost of capital is 9%, the company is earning 6 percentage points above what its investors require, which is $10,000,000 x 0.06 = $600,000 of value created in the year.Case study
Seen in the real world.
Stonebridge Logistics is a fictional freight company invented to illustrate this idea. Its owners looked at net income of $900,000 and thought the business was performing poorly compared with a competitor reporting $1,400,000.
An adviser calculated NOPLAT for both. Stonebridge had EBIT of $2,400,000, so at a 25% tax rate its NOPLAT was $1,800,000, while the competitor had EBIT of $2,300,000 and NOPLAT of $1,725,000.
The gap in net income came almost entirely from interest, because Stonebridge had borrowed to buy trucks. The operating performance was actually slightly better, and the owners decided the real issue was the cost and level of their debt, not their operations. They agreed to use the next year's surplus cash to repay the most expensive loan first.
Watch out
Common mistakes.
- Starting from net income instead of operating profit. That brings in financing effects that NOPLAT is meant to exclude.
- Using the reported tax charge without adjusting for the interest tax shield. The interest deduction should be removed so the figure reflects operations only.
- Comparing NOPLAT with net income as if they measured the same thing. They answer different questions, one about operations and the other about the whole mix of operations and financing.
Questions
People also ask.
What does NOPLAT tell me that EBIT does not?
It shows operating profit after tax, which is closer to what is available to all investors, and it can be compared with invested capital.
Is NOPLAT the same as NOPAT?
In practice the terms are very close. NOPLAT stresses that the taxes are adjusted to reflect operations only.
How is it used in valuation?
It is a starting point for free cash flow and for return on invested capital, which are central to discounted cash flow analysis.
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