What Is Net Operating Profit Less Adjusted Taxes (NOPLAT)?
I'm here to explain NOPLAT directly to you: it's a financial metric that figures out a firm's operating profits after adjusting for taxes. You should know that by starting with operating income— that's income before interest payments— NOPLAT gives you a clearer picture of operating efficiency than just looking at net income.
Key Takeaways
- NOPLAT is EBIT after adjusting for deferred taxes.
- The tax adjustment reflects the un-leveraged profits of the firm without considering tax debt effects.
- This metric measures profit including the costs and tax benefits of debt financing.
- NOPLAT is heavily used in M&A, DCF, and LBO models because it helps calculate free cash flow.
Understanding Net Operating Profit Less Adjusted Taxes (NOPLAT)
Let me break this down for you: NOPLAT is a company's earnings before interest and taxes (EBIT) after adjustments for deferred taxes. The tax is adjusted to show the un-leveraged profits without accounting for tax debt effects. Essentially, it's a profit measure that factors in the costs and tax benefits of debt financing.
You need to understand that this tool excludes the effects of a firm's capital structure by removing the monetary costs of equity and debt from the calculation. Since NOPLAT minus the cost of capital gives you a firm's economic profit, it's also key for calculating Economic Value Added (EVA), which measures management performance by comparing economic profit to the total cost of capital.
When you use NOPLAT, you're able to examine the profits from a company's core operations after subtracting related income taxes and adding back any overpaid taxes from the period. It doesn't include income from non-operating assets, but it does add profit from invested capital.
Operating income, which is the company's profit before interest and taxes, shows what the company would earn without debt or interest expenses. Since we only use operating income here, evaluating operating efficiency with NOPLAT isn't affected by the company's leverage or loans on its balance sheet— debt servicing like interest reduces the bottom line and tax expense, but NOPLAT avoids that distortion.
Example of NOPLAT
You can calculate NOPLAT for a firm as operating income times (1 - tax rate). Take Bed Bath & Beyond Inc. (BBBY) for the fiscal years ended March 3, 2018, and February 25, 2017, as an example— I'll walk you through the numbers.
In 2018, revenue was $12,349,301 thousand, cost of goods sold $7,906,286 thousand, gross margin $4,443,015 thousand, selling, general and admin expenses $3,681,694 thousand, operating income or EBIT $761,321 thousand, interest expense $65,661 thousand, income tax at 35.57% $270,802 thousand, and net income $424,858 thousand. NOPLAT was $761,321 x (1 – 0.3557) = $490,519 thousand.
In 2017, revenue was $12,215,757 thousand, cost of goods sold $7,639,407 thousand, gross margin $4,576,350 thousand, selling, general and admin expenses $3,441,140 thousand, operating income or EBIT $1,135,210 thousand, interest expense $69,555 thousand, income tax at 33.52% $380,547 thousand, and net income $685,108 thousand. NOPLAT was $1,135,210 x (1 – 0.3352) = $754,633 thousand.
You see the increase in operating costs from 2017 to 2018 caused a drop in operating profits for Bed Bath & Beyond, which lowered NOPLAT. Generally, an efficient company should have positive NOPLAT, and an increase can lead to a higher stock price for public companies.
NOPLAT is crucial in mergers and acquisitions (M&A), discounted cash flow (DCF), and leveraged buyout (LBO) models because it allows you to calculate an investment's free cash flow (FCF).
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