NOPAT: Formula, Meaning and Real-Life Examples (2024)

NOPAT Definition: Net Operating Profit After Taxes (NOPAT) equals a company’s Operating Income * (1 – Tax Rate), and Operating Income should ideally be adjusted for non-recurring charges; it represents the company’s core business income after taxes and is a key component of Unlevered Free Cash Flow.

Like many metrics, NOPAT is mostly an “intermediate step” in financial models and other analyses, such as the DCF model.

It plays a direct role in some calculations, such as Return on Invested Capital (ROIC), but very few people calculate NOPAT as an independent metric.

Instead, they calculate it to estimate a company’s Unlevered Free Cash Flow for use in a discounted cash flow model, credit analysis, or something similar.

Our Interview Guide and Core Financial Modeling course both cover the concept of NOPAT extensively, and you can see an example NOPAT calculation from our free Walmart DCF model below:

Here are the Files & Resources for this tutorial, including the Walmart example above:

Files & Resources:

Walmart – DCF Model and Tutorial (M&I)

NOPAT and ROIC Calculations for Best Buy vs. Target (XL)

Best Buy – 10-K Extracts (PDF)

Target – 10-K Extracts (PDF)

NOPAT Formula

Some sources present an “alternate” formula for NOPAT and say that you can calculate it like this:

NOPAT = Net Income + Taxes + Net Interest Expense + Non-Core Income/Expenses) * (1 – Tax Rate)

No one does this in real life because it’s far more complicated than taking the Operating Income and multiplying by (1 – Tax Rate).

With most NOPAT calculations, there is only one real question: Should you adjust Operating Income (EBIT) for non-recurring expenses, and if so, which ones should you add back?

There’s no universal answer – please see our coverage of non-recurring expenses – but, generally, you should be cautious when making “adjustments.”

Many companies label items “non-recurring” when they are, in fact, recurring. There’s a good example below for Best Buy:

If we were calculating NOPAT for Best Buy, we would not add back this Restructuring expense, just like we would not add it back in the EBITDA calculation.

A secondary question in the NOPAT formula is how to find the proper tax rate.

We recommend taking an average over the last 3-5 years (i.e., Taxes / Pre-Tax Income on the Income Statement over this time frame) and using this percentage.

If this produces a nonsensical result, such as 70% or (35%), you could also take the standard corporate tax rate in the company’s country, which you can easily find online.

What Does NOPAT Mean?

NOPAT is the “after-tax version” of EBIT.

EBIT: The company’s core, recurring business income before capital structure and taxes.

NOPAT: The company’s core, recurring business income before capital structure but after taxes.

NOPAT explicitly ignores the net interest expense because it’s supposed to be capital structure-neutral and, therefore, won’t be affected by a company’s Cash, Debt, or Equity.

NOPAT is “available” to all the investors in the company, so it can be used to pay the shareholders, the lenders, and the Preferred Stock investors (if they exist).

You should NOT adjust the Taxes for the “tax shield” created by the company’s Debt and Interest Expense!

This idea makes no sense because NOPAT is capital structure-neutral.

If you are explicitly ignoring the company’s Debt and Equity percentages and saying they don’t matter, you can’t also give the company a “tax benefit” for a certain amount of Debt.

NOPAT vs. Unlevered Free Cash Flow

As shown above, NOPAT is an “intermediate step” used in calculating Unlevered FCF:

The main differences vs. UFCF are as follows:

Depreciation & Non-Cash Add-Backs: UFCF includes these add-backs because items such as Depreciation affect the company’s taxes but are not actual cash outflows in the current period.

Deferred Income Taxes and Cash Taxes: NOPAT does not reflect the true “Cash Taxes” the company pays to the government, but UFCF does.

NOPAT reflects something closer to the “Book Taxes” the company pays, i.e., the amount shown for “Taxes” on the Income Statement.

But in reality, most companies pay a slightly different amount to the government (“Cash Taxes”) because of factors like accelerated depreciation, stock-based compensation, and R&D tax credits.

UFCF captures these nuances by taking the Tax deduction in NOPAT and adjusting it based on the “Deferred Tax” line from the Cash Flow Statement.

Change in Working Capital: NOPAT does not reflect the Change in Working Capital, used to reflect the cash-flow impact of issues such as delivering products before receiving cash payments for the products.

UFCF does reflect this item in full, so it is much closer to the company’s true cash flow.

Capital Expenditures (CapEx): Finally, NOPAT ignores Capital Expenditures, which represent the company’s investments in long-term assets such as factories and equipment.

By contrast, Unlevered Free Cash Flow deducts CapEx, which makes it much closer to the company’s true cash flow.

NOPAT in Financial Models

In 99% of cases, NOPAT is used in the DCF model as a component of Unlevered Free Cash Flow, as demonstrated in the Walmart file here.

However, you could use it in other ways as well:

Valuation Multiples – You could turn it into a valuation multiple (Enterprise Value / Net Operating Profit After Taxes, or abbreviated to TEV / NOPAT) because NOPAT is capital structure-neutral, just like Enterprise Value.

However, almost no one uses this in real life, so it is rare next to standard multiples such as TEV / EBITDA and TEV / EBIT.

Debt Capacity – You could also use metrics like Debt / NOPAT or NOPAT / Interest to assess a company’s ability to service its Debt, but these are much less common than metrics based on EBITDA or Free Cash Flow.

Returns-Based Metrics – Finally, NOPAT is also useful when calculating “Returns-based” metrics such as ROE, ROA, and ROIC – see the next section.

NOPAT in Return on Invested Capital (ROIC)

The Return on Invested Capital metric is normally defined as:

ROIC = NOPAT / Invested Capital, where Invested Capital = Debt + Equity + Other Long-Term Funding Sources

“Other Long-Term Funding Sources” could include Preferred Stock or items such as Unfunded Pensions, and some people argue that Leases should also be included (there’s also a debate about whether you should subtract Cash in the calculation).

Regardless of the exact formula used, ROIC measures how efficiently a company uses its “capital” (funding sources) to generate after-tax profits.

You can see an example calculation for Target below:

NOPAT is used in this calculation because it is capital structure-neutral, meaning it is “available” to all the investors in the company: Debt, Equity, Preferred, and anything else that might count as long-term funding (e.g., unfunded pensions).

Comparing the NOPAT / Invested Capital of different companies tells us which one is operating most efficiently:

The quick interpretation here is that Best Buy seems to be far more “efficient” than Target.

However, Best Buy’s ROIC numbers are so high that they seem unbelievable – which may be a sign that we need to calculate it differently.

For example, one issue here is thatleases and lease liabilities seem much more significant for Best Buy than Target (see: our lease accounting tutorial).

So, we may want to adjust for this in the calculation by counting leases as part of “Invested Capital” for both companies and adding back their respective lease expenses to EBIT.

The bottom line is that for NOPAT and ROIC to be meaningful, you must calculate them consistently for all the companies you’re analyzing.