NOPAT (Net Operating Profit After Tax)
Principles of Finance glossary · Financial Statements, Markets & Working Capital
Definition
Operating profit after taxes but before financing costs: NOPAT = EBIT · (1 - T). The starting point of free-cash-flow-to-the-firm builds and the numerator of return on invested capital. Removes capital-structure effects, allowing apples-to-apples comparison of operating profitability across firms with different leverage.
NOPAT (Net Operating Profit After Tax) in plain English
Imagine you want to judge how good a business is at its ACTUAL business — making and selling things — without getting distracted by how it borrowed money to do it. NOPAT is the profit from running the business, after subtracting taxes but ignoring interest paid on loans. You compute it as NOPAT = EBIT · (1 - T), where EBIT is operating profit (earnings before interest and taxes) and T is the tax rate — so if a firm earns $100 of operating profit and taxes are 25%, its NOPAT is $75. The trick is that it strips out borrowing decisions, so you can fairly compare two companies' core moneymaking skill even if one is drowning in debt and the other has none.
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