Why is it beneficial to use Net Operating Profit After Tax as opposed to net income when making an investment decision?
It is more beneficial to use net operating profit after tax, or NOPAT, as opposed to net income when making an investment decision because a company's NOPAT is a measure of profit that excludes the cost and tax benefits of debt financing in that company's capital structure.
What Exactly Is Net Operating Profit After Tax?
NOPAT is essentially a company's earnings before interest and taxes, or EBIT, adjusted for the impact of tax structure. The equation for NOPAT is as follows:
Net Operating Profit After Tax = (operating income) x (1-tax rate)
Why Is a Company's Net Operating Profit After Tax More Important to an Investor Than Its Net Income?
If, for example, a company has $100 of NOPAT but also has a $100 monthly interest payment, it looks unprofitable to an investor. It is possible, however, that the company could be actively paying down its debt or plans to take on an interest payment of this amount, meaning the operations might be fine, and thus worth a long-term investment.