What is Net Operating Profit Less Adjusted Taxes (NOPLAT)?
Net operating profit less adjusted taxes (NOPLAT) is a measure of profit that includes the costs and tax benefits of debt financing. put another way, NOPLAT is earnings before interest and taxes (EBIT) adjusted for the impact of taxes.
How Does Net Operating Profit Less Adjusted Taxes (NOPLAT) Work?
Net operating profit less adjusted taxes (NOPLAT) is also referred to as net operating profit after tax (NOPAT).
The formula for NOPLAT is:
To see how NOPLAT works, consider Company XYZ's income statement:
Using this information and the formula above, we can calculate that Company XYZ's NOPLAT is:
NOPLAT = $150,000 x (1 - 0.36) = $96,000
Analysts often adjust operating income to convert accrual accounting to cash accounting or will capitalize some expenses (i.e., removed them from the income statement and pretend they were recorded on the balance sheet instead).
Why Does Net Operating Profit Less Adjusted Taxes (NOPLAT) Matter?
note that NOPLAT uses only operating income -- the income before taking interest payments into account. For this reason, NOPLAT is a crucial measure in a variety of financial analyses because it gives a clearer view of operating efficiency -- a view that is not clouded by how leveraged the company is or how big of a bank loan it was able to get. This is important, because those interest payments on debt reduce net income and thus reduce the company's tax expense. Accordingly, NOPLAT is also used to calculate Economic Value Added (EVA)
It is important to note that some industries intrinsically have higher costs than others. This is why comparing NOPLATs is generally most meaningful among companies within the same industry, and the definition of a 'high' or 'low' ratio should be made within this context.