The success of a business is determined by how profitable that business is over time. After you calculate your gross profits, you must then deduct all associated expenses for your business. This leaves you with your net profits. However you still have to deduct the taxes you have to pay Uncle Sam. NOPAT, or Net Operating Profit After Taxes, will let you know exactly how much money you are making in your business. The NOPAT answer can then be plugged into even more complex equations to gain a more detailed look of the health of your business.
Understand the equation associated with calculating profit after tax. The equation reads:
Operating Income x (1-Tax Rate) = NOPAT
In this equation, the operating income refers to the amount of money the company made after all liabilities have been paid. This includes things like employee salary, health benefits, retirement and other operational costs. The "1" represents 100 percent. And the Tax Rate is the current rate at which the business is being taxed. If you are calculating both federal and state taxes, those numbers may be added together and the sum then subtracted.
Plug the variables into the NOPAT equation. For example, say a company made $1,000,000 in net operating income. The state tax rate was 8 percent and the federal tax rate was 25 percent. The equation would read as follows:
1,000,000 x [ 1-(.25 +.08) ] = NOPAT
Notice that the tax rates are written in decimal form for calculation.
Calculate the NOPAT Equation. For the example in Step 2, the answer is:
1,000,000 x [1-(.33)] = NOPAT
1,000,000 x .67 = $670,000
This particular corporation had a net operating profit after tax of $670,000.
This calculation excludes debt financing and associated tax breaks.
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