Net Operating Profit Less Adjusted Taxes (NOPLAT) is a financial metric that offers a comprehensive look at a firm’s operating efficiency by adjusting for taxes. By focusing on operating income—the earnings before interest and tax—NOPLAT serves as a more accurate gauge of performance compared to net income.
Key Insights
- NOPLAT is EBIT adjusted for deferred taxes to reflect the firm’s un-leveraged profits.
- It measures profit inclusively, accounting for the costs and tax benefits of debt financing.
- Widely used in M&A, Discounted Cash Flow (DCF), and Leveraged Buyout (LBO) models as it aids in calculating free cash flow.
Deep Dive into NOPLAT
Net Operating Profit Less Adjusted Taxes (NOPLAT) accounts for a company’s operating profits after making adjustments for deferred taxes. By doing so, it isolates the un-leveraged profit margins, unrestricted by the effects of tax debt. Essentially, this metric captures the net profit including the costs and tax benefits of debt financing.
Why Exclude Capital Structure?
To present a more refined metric, NOPLAT excludes the influence of a firm’s capital structure. By removing the financial costs associated with equity and debt, NOPLAT offers a clearer view unattached from the economic responsibilities tied to borrowed capital. This makes it aligned with calculations of Economic Value Added (EVA), a measure used to gauge management performance against the cost of capital.
Operating Income as the Core
By spotlighting operating income—profits before interest and tax payments—NOPLAT gives a skew-free lens into operating efficiency. It neglects factors like corporate leverage or loan liabilities, offering pure insights into how well a company manages its expenses and revenue generation.
Practical Example: Bed Bath & Beyond Inc. (BBBY)
To contextualize, let’s measure NOPLAT for Bed Bath & Beyond Inc. (BBBY) using data from two fiscal years.
| 2018 | 2017 | |
|---|---|---|
| Revenue | $12,349,301 | $12,215,757 |
| Cost of Goods Sold | 7,906,286 | 7,639,407 |
| Gross Margin | 4,443,015 | 4,576,350 |
| Operating Expenses | 3,681,694 | 3,441,140 |
| Operating Income (EBIT) | 761,321 | 1,135,210 |
| Interest Expense | 65,661 | 69,555 |
| Income Tax (rate) | 35.57% (270,802) | 33.52% (380,547) |
| Net Income | $424,858 | $685,108 |
| NOPLAT | $490,519 [(761,321 x (1 - .3557)] | $754,633 [(1,135,210 x (1 - .3352)] |
The reported year-over-year increase in operating costs contributed to decreasing operational profits from 2017 to 2018 for Bed Bath & Beyond, subsequently diminishing its NOPLAT. Typically, a company demonstrating operational efficiency should reflect a positive NOPAT, translating to higher stock prices.
Widely recognized in strategic pursuits like mergers and acquisitions and financial modeling, NOPLAT is indispensable for calculating Free Cash Flow (FCF), offering profound insights crucial for investment evaluations.
Related Terms: EBIT, Net Income, Deferred Taxes, Economic Value Added (EVA), Discounted Cash Flow (DCF), Capital Structure, Operating Efficiency.
References
- Tally Solutions. “What Is the NOPAT Formula? – Net Operating Profit After Tax”.
- Accounting Tools. “Earnings Before Interest and Taxes - EBIT Definition”.
- Accounting Tools. “Economic Value Added Definition”.
- Accounting Tools. “Operating Income Definition”.
- U.S. Securities and Exchange Commission. “Bed, Bath, and Beyond, Inc., Form 10-K, For the Fiscal Year Ended February 25, 2017”, Page 35.
- U.S. Securities and Exchange Commission. “Bed, Bath, and Beyond, Inc., Form 10-K, For the Fiscal Year Ended March 8, 2018”, Page 34.
