Net operating profit after tax (NOPAT) is one of the key parts of calculating free cash flow. It has two parts so let’s look at them;
- Net operating profit = this is simply the profit that the company makes from its operations after its paid all of its operating expenses (also called earnings before interest and taxes, EBIT). You’ll find it on the income statement below the operating expenses. The income statement starts with sales, which is just all the money your company received from selling things. Then you subtract out the cost of goods sold, which is the direct costs associated with making the things. Then you subtract out the operating expenses, which is all the costs that you need to run your company (advertising, selling, administrative, research and development). This gives us the net operating profit.
- After taxes = every company that turns a profit needs to pay taxes on that, and so we need to deduct taxes out of this operating profit. We do this by multiplying the net operating profit by (1 – [tax rate]).
So the complete way of calculating NOPAT is; NOPAT = (Operating Profit)*(1-[tax rate])