Term · Profitability & Growth
NOPAT
In briefNOPAT is operating profit after notional taxes but before financing costs, calculated as EBIT times one minus the tax rate. It measures operating earning power independent of capital structure and forms the numerator for return metrics such as ROIC.
Definition
NOPAT is a company's operating profit after deducting notional taxes but before financing costs. It shows the result the operating business generates independent of capital structure. NOPAT is the starting figure for return metrics such as ROIC and for capital-structure-neutral valuations.
How it is calculated
Formula. NOPAT = EBIT × (1 − tax rate)
Why it matters for small caps
For small caps with differing levels of debt, NOPAT allows a fairer comparison of operating earning power. It removes the influence of financing and serves as the numerator in the ROIC calculation.
Common misreadings
- NOPAT is confused with net income, even though it excludes financing costs and applies only a notional tax.
In the process
Frequently asked
Why are only notional taxes deducted in NOPAT?
To present operating profitability independent of financing; the actual tax is influenced by interest deductions.
How does NOPAT differ from net income?
Net income includes financing costs and actual taxes, whereas NOPAT deliberately excludes financing.
What is NOPAT used for?
Above all as the numerator in ROIC and in capital-structure-neutral valuation and value-creation analyses.
Related terms
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.