Net Operating Profit Less Adjusted Taxes (NOPLAT)
What Is Net Operating Profit Less Adjusted Taxes (NOPLAT)?
Net operating profit less adjusted taxes (NOPLAT) is a financial metric that computes a firm's operating profits subsequent to adjusting for taxes. By utilizing operating income, or income before considering interest payments, NOPLAT fills in as a better indicator of operating effectiveness than net income.
Understanding Net Operating Profit Less Adjusted Taxes (NOPLAT)
Net operating profit less adjusted taxes (NOPLAT) is a company's earnings before interest and taxes (EBIT) subsequent to adapting for deferred taxes. The tax is adjusted to mirror the un-leveraged profits of the firm without considering the effects of tax debt. In effect, this measurement is a profit measurement that incorporates the costs and tax benefits of debt financing.
The effects of a firm's capital structure are excluded from this profit measurement instrument by eliminating the monetary costs of equity and debt from the NOPLAT calculation. Since NOPLAT minus cost of capital equals a firm's economic profit, NOPLAT is likewise used to work out Economic Value Added (EVA). The EVA is a measure of management performance to compare economic profit to the total cost of capital.
Utilizing NOPLAT, an analyst or investor can investigate the profits generated by a company's core operations in the wake of deducting the income taxes connected with the core operations and adding back in taxes that the company had overpaid during the accounting period. Any income generated from non-operating assets are excluded, be that as it may, profit from invested capital is added.
Operating income — the company's profit before interest and taxes — shows what the company would earn assuming it had no debt (no interest expense). Since just operating income is utilized, the evaluation of a business' operating effectiveness utilizing NOPLAT isn't influenced by how much leverage the company has or the amount of loans it possesses on its balance sheet given that debt servicing, that is, the interest used to finance debt, negatively influences a firm's primary concern and, consequently, diminishes its tax expense.
Illustration of NOPLAT
NOPLAT for a firm is calculated as operating income x (1 - tax rate). For instance, we should compare the net operating profit less adjusted taxes for Bed Bath and Beyond Inc. (BBBY) for the fiscal years ended March 3, 2018, and Feb. 25, 2017.
| (USD in thousands) | 2018 | 2017 |
| Revenue | $12,349,301 | $12,215,757 |
| Cost of Goods Sold | 7,906,286 | 7,639,407 |
| Gross Margin | 4,443,015 | 4,576,350 |
| Selling, general and admin. expenses | 3,681,694 | 3,441,140 |
| Operating Income or EBIT | 761,321 | 1,135,210 |
| Interest expense | 65,661 | 69,555 |
| Income Tax (35.57% and 33.52%, respectively) | 270,802 | 380,547 |
| Net Income | $424,858 | $685,108 |
| NOPLAT | 761,321 x (1 – 0.3557) = $490,519 | $1,135,210 x (1 – 0.3352) = $754,633 |
NOPLAT is utilized widely in mergers and acquisitions (M&A), discounted cash flow (DCF), and leveraged buyout (LBO) models since it enables the calculation of a venture's free cash flow (FCF).
Features
- The net operating profit less adjusted taxes (NOPLAT) is EBIT subsequent to adjusting for deferred taxes.
- NOPLAT is utilized to vigorously in M&A, DCF, and LBO models as it enables the calculation of free cash flow.
- The tax is adjusted to mirror the un-leveraged profits of the firm without considering the effects of tax debt.
- This measurement is a profit measurement that incorporates the costs and tax benefits of debt financing.
