In order words, NOPAT is an excellent means of performing various analyses as it gives a realistic view of a business operating efficiency. It primarily examines the company’s core operations. NOPAT focuses solely on the profitability of the organization itself.
How is “Operating Income” Determined?
Operating income is used to measure the amount of total profits from business operations. Business operations are expenses such as wages, depreciation, and cost of goods sold (COGS). To determine the Operating Income subtract the operating expenses from the gross income.
Operating expenses include such factors as utilities and office materials and supplies, as well as other day-to-day materials that are used to run the business. Another way to define Operating income is, it is used to determine how much of your revenue will turn to profit. It excludes such factors as taxes, interest expenses and expenses used towards investments in other companies or to pay for lawsuits or court settlements.
With the following formula calculates Operating Income:
Operating Income = Gross Income – Operating expenses – depreciation – amortization
How is NOPAT used as a measure of a successful business?
Net Profits After Tax is an extremely efficient for comparing the number of manufacturers that are in the same industry and have different financial systems. However, NOPAT is not an effective way of comparing businesses in entirely different industries. For example, two window manufacturing companies can use NOPAT as a business comparison. A windows manufacturing company and a food production company cannot compare their NOPAT statistics, as they would not be able to correspond as the companies differ significantly in many areas, such as supply and demand.
How does Cost of Goods Sold (COGS) affect NOPAT?
The cost of goods sold, or COGS is the total sum of all costs that refer to the goods sold by a business. COGS includes but is not limited to labor, parts, overhead, direct labor, materials used to produce the product. For companies that provide a service, this includes payroll taxes and benefits as well as billable hours. Retail attributes to the merchandise purchased from the manufacturer. COGS may be deducted from the revenue when calculated the gross margin.
For those businesses with a periodic inventory system, Cost of Goods Sold (COGS) is calculated as follows:
Starting inventory + purchases – ending inventory.
For those businesses with a perpetual inventory system, Cost of Goods Sold (COGS) is compiled over time as you are selling goods to customers. COGS encompasses total sum of a large amount of separate and unique transactions.
What is the Difference between Net Operating Profit After Tax (NOPAT) and Net Income?
Net Operating Profit After Tax is the operating profit after tax reduction and is used to calculate the overall profitability. It enables companies to reckon their profit when there is no financing for debt.
NOPAT – Operating Income x (1 – Tax Rate)
Net Income is the net earnings that remain after all of the expenses, taxes, preferred stock and interest from gross profit. A percentage of the net income is handed over to reserves and surplus while you distribute the meaning amongst the company shareholders.
The formula for determining Net Income is as follows:
Net Income = Net Profit – (Interest + Tax + Dividends to Preference Shareholders
Differences between Net Income and Net Operating Profit After Tax
- NOPAT does not incur tax shield on interest while it does incur for Net Income
- Net Profit is used to judge the overall performance of a company while you calculate NOPAT between various businesses that are similar in nature.
- You calculate Net Income after all expenses such as profit, dividend and taxes are deducted while you calculate NOPAT by subtracting the tax amount from the operating profit.
How is NOPAT Beneficial for the Manufacturing Industry?
Net operating profit after tax is extremely useful for the manufacturing industry as it will thread the overall company income as long as there is no debt withstanding. It is also beneficial when comparing one or more company-based projects or jobs as well is an overall comparison and contrast company statistics.