NOPAT | Definition | Formula | Example - YouTube

hello everyone hi welcome to the channel of WallStreetmojo friends today we have a

topic which is known as NOPAT NOPAT one of the important aspect that is

considered for either is earning value-added and Evi for many other

purpose this has been used so what exactly NOPAT means see no bad is

basically your net operating profit after taxes net operating profit after

taxes right and why net operating profit after taxes is use so do you think you

know NOPAT has any relevance in terms of the ascertaining you know right

picture of the financial affairs of the company and if so how NOPAT taxes has

been calculating this Tutorial we'll talk in length about the net operating profit

after taxes and learn how to compute it by using various examples but the very

first and you need to understand that you know NOPAT means net

operating profit after taxes but this is being done to calculate the

free cash flow

for before before any sort of merger or acquisition right and it is very useful

to the investor for the same reason so what do you mean by NOPAT see it's

basically taking into account your EBIT which is your operating profit

earning before interest and tax and then deducting or adjusting the amount like

for example let's say your EBIT is standing at $40,000 so the

adjustable tax over here let's say because you have to deduct tax from that

let's say it is $8,000

though your net operating profit that sir NOPAT would be $40,000 -

$8,000 that's gone we 32,000 so there is a particular reason for which

the NOPAT is useful the reason is to get an idea in or how the tax benefits

of the debt financing affects the cash flow so if a firm uses debt as a part of

the capital structure the firm gets tax benefits

right the form gets what its its tax benefits and the reason we deduct the

taxes from the operating profit of the form for the year and then they use as a

NOPAT before the mergers and acquisition let's get to the formula

part of the NOPAT see net operating profit after tax formula is quite simple

like just look at the what we call as the operating profit

of the firm and then you need to deduct the adjustable our taxes if any from the

operating profit and that's it you would get the net operating profit

of after-tax so NOPAT is equal to your EBIT into 1- the tax rate right

now in the example you know we would see you know how to calculate the NOPAT

after taxes from the income statement there is now take a basic example of NOPAT

and this is the list of the information which I'm going to place in

front of you let's say there is a revenue which is standing at 1,00,000

then there is a cost of goods sold which is 50000 there is labour which

is 30000 there's general and administrative expenses which is let's

say starting at $5000 and there is interest

expense that is a $2,000 tax rate here is let's say 30% so now we need to

calculate the net operating profit after taxes so we have everything we need and

here's how or to come up with the NOPAT so the no part is going to be the

cost of goods sold the COGS sorry the revenue first you start with the

answer here it's gonna be their revenue which is standing at 100000 then we

have to deduct the cost of goods sold which is less 50000 negative so

we'll get the gross margin from here the gross margin is going to be 50000

right from that we have labour which is negative 30000 so

after labour we get we have the G&A journal in administrative expenses which

is again standing at negative 5000 so in general we get a EBIT is

equal to gross margin plus labour plus G&A to 15000 we have and for

the interest expense that are standing at negative 2000 finally what we

get is the profit before tax PBT that is 15000 + 2000 that is

13000 and then we have the tax which is on this 30% so

finally we get the net income that is 9100 so we have the net

income in front of us so we would we'll calculate the net operating profit after

taxes it's quite simple we can do it in two ways the first we can calculate

using your EBIT

right and their tax rate and let's look at that first now the NOPAT is going

to be from the EBIT perspective EBIT into 1 minus the tax rate well that's

going to be what is the EBIT a here for us 15,000 so this value into 1 minus

what is the tax rate 30% this deduct that so 10,000 our 500 is your net

profit or operating profit after tax usually just calculate by this method

this is the easiest way to do so this is I'm showing you the consolidated income

statement of Nestle if you look at the income statement of Nestle it and from

the information we will calculate the no part over here there's operating

profit that's the EBIT and down there's a taxes so just Deducted operating profit

that is 12408 and 3305 will get the answer so

it's it was 12408 and the taxes were

3305 and for the previous year it was 10905 and the

taxes that were standing at 3367 so we just need to deduct

these two things and you will get your answer as the NOPAT so you can see

now the NOPAT of Nestle Company we have calculated you know as the tax rate

has not mentioned we will compute the you know rate over here well the rate

can be you know in different ways you know this this amount that has been

found in on that is based on the rate and that will be based on the profit

before tax associate of the joint venture over here that's

3305 so the the taxes 3305 will be compared to11784

so when you divide that you get 28% and over here you get

33% so right by using this tax rates what you can do in the

will calculate the NOPAT for both the years and the answer was right in front

of us now I want you to calculate the NOPAT for Colgate-palmolive company they

have the operating profit right in front of us so it's calculate the net

operating profit after taxes for Colgate no this is the income statement of

Colgate we have the operating profit in front of us so we know that the EBIT of

Colgate which is $3,837 million and the EBIT

about does not contain the non-cash items like you know depreciation and

Amortisation any restructuring cost however you know

the non-recurring items like you know restructuring

costs it needs to be adjusted for calculating the NOPAT so I'm gonna show

you a snapshot of gold its restructuring cost from 10K filings gold its

restructuring cost 228 you know million dollar right and if you see the adjusted

EBIT over here like you know it just a EBIT it is going to be a EBIT plus your

restructuring cost so the EBIT was $3,837 million and you

need to add the restructuring cost that was 228 so once you add this you get the

adjusted EBIT and finally based on that you know you deduct tax and you get the

NOPAT so in this fashion we have covered up two examples we have covered

the meaning significance at the same time we have covered with the the full

fledge example that's it for this particular topic thank you everyone for

joining the session