Net Operating Profit After Tax (NOPAT) Definition and Formula

Published on Thursday 5 June 2025

• What is NOPAT?
• Why is NOPAT important?
• NOPAT vs net income
• Operating profit vs NOPAT
• NOPAT formula explained
• How to Calculate NOPAT
• Streamline your NOPAT analysis with Xero

What is NOPAT?

Net Operating Profit After Tax (NOPAT) tells you how much profit your business earns from its core activities, after tax but before interest. NOPAT measures a business's profits after tax but before interest, but it only includes income and expenses related to the company's main operations.

This key financial metric lets you see how much a company earns from its core business activities, after paying its tax bill. NOPAT doesn't include any money the business earns from other activities, such as gains on stocks owned by the business. It also doesn't account for any of the interest expense the business pays on its loans, credit cards, or other debts.

Instead, NOPAT focuses on the business's core operational activities. The NOPAT formula also helps you calculate the value you're getting back from your investment in a business.

Why is NOPAT important?

NOPAT lets you see how profitably a business is operating, regardless of how much debt it has. This number lets you easily compare businesses in different regions or industries. It also helps you see how much a business earns from its loans and invested capital.

Reveals true business performance

By excluding financing costs, NOPAT lets you zone in on the business's operational performance. This metric shows you how the business is doing outside of its debt obligations, while also being realistic about its tax burden.

Knowing the importance of NOPAT and its formula is especially helpful for evaluating businesses with complex financial structures and multiple investors. Focusing on operational profits helps you identify areas for improvement and make decisions about long-term growth.

Helps to standardise comparisons

NOPAT standardises comparisons between different companies in different areas. If a business is in debt, its net profits may be low and its cash flow may be strained. NOPAT lets you focus on the health of its core operations. It also helps you compare how the tax rates in different areas affect the company's bottom line.

Let's say you're thinking about buying a business and comparing a few options. Company A has $100,000 in net profit, while Company B has $80,000 in net profit. Company B has a lot of debt – if you exclude its interest payments, its profit jumps to $120,000. The NOPAT calculation formula helps you focus on how the company is really doing by highlighting its potential if you get it out of debt or restructure its loans.

Similarly, let's say you're comparing businesses in different tax jurisdictions. NOPAT shows you exactly how the tax liabilities in each of these areas affect profits.

Improved decision-making

NOPAT also improves decision-making because it shows you how the money invested in a business is performing. It does this by helping you calculate Economic Value Added (EVA).

EVA puts interest back into the equation, but it also takes shareholder equity into account. To determine EVA, start with NOPAT and then subtract total invested capital times the cost of the capital.

For example, imagine NOPAT is $50,000. Now, let's say the business has $100,000 in loans at 6% interest and you invested $100,000 in cash. Your capital investment is $200,000 at an average cost of 3%. That means you subtract $6000 from $50,000, which gives you an EVA of $44,000.

In other words, the $200,000 wrapped up in this company is generating $44,000 per year. This metric becomes even more important when you're dealing with a company with a lot of shareholders. EVA helps you see how well the shareholders' investments are performing, and it's critical for guiding decisions about future investments or loans.

Look at EVA calculation examples.

NOPAT vs net income

Here's the main difference between NOPAT vs net income:

Net income includes all of the business's income, expenses, and taxes.

NOPAT does not include interest expenses or any non-operating income or expenses.

Net income is the bottom line – it accounts for operational expenses, interest, depreciation, amortisation, and taxes. It also includes all of the income and expenses the business earns from side activities or investments. NOPAT excludes interest and any income or expenses that are not related to the business's core operations.

To explain, let's say a bakery has $100,000 in net income, but it earns $12,000 from renting space in its parking lot to a food truck, and it pays $8,000 in interest on loans. To find its NOPAT, exclude the interest and the rent (because that's not a core business activity). That brings the NOPAT to $80,000.

NOPAT focuses on operational efficiency, while net income includes everything. However, if a business doesn't have any debt or other income streams, then its NOPAT and net income are the same.

Operating profit vs NOPAT

Both operating profit and NOPAT show how much a business earns from its core operations before subtracting interest expenses. But operating profit doesn’t include taxes, while NOPAT does. Neither of these numbers include income or expenses that aren't related to the main operations.

To calculate operating profit, add the tax back into NOPAT. Say the NOPAT is $80,000 and the business's tax liability is $16,000. That means that the operating profit is $96,000.

NOPAT formula explained

Let's break down the NOPAT formula:

NOPAT = Operating Profit x (1- tax rate)

Start with operating profit . Again, that's profit after all expenses including depreciation and amortization but before taxes or interest. Then, calculate the portion of profit you get to keep after taxes by subtracting your effective tax rate from 1.

For instance, if your tax rate is 20%, multiply operating profit by 80% to get NOPAT.

Note that operating profit is often confused with EBIT – earnings before interest and tax. But there's a slight difference – EBIT includes all income sources while operating profit only includes operating income ( money earned from your main line of business).

How to Calculate NOPAT

To nail down the formula, let's see how it relates to a net operating profit after tax example.

1. Determine operating profit

First, determine your operating profit – your earnings before tax and interest (EBIT) without including non-operating income. Calculate this number by subtracting operating expenses from gross profit (revenue minus cost of goods sold).

2. Find the tax rate

To figure out your effective tax rate, divide the income tax you paid last year by your operating profit. For instance, if your operating profit was $100,000 and you paid $20,000 in tax, your tax rate is 20%.

If you anticipate higher earnings this year, do some calculations to determine how that may increase your effective tax rates.

3. Apply the formula

Now that you have the numbers, it's time to apply the NOPAT formula. To illustrate, let's use these sample numbers:

• Operating profit: $50,000
• Tax rate: 25%

$37,500 = $50,000 * (1-.25)

That means after tax (but not including interest), your business's operations earn $37,500 per year.

Streamline your NOPAT analysis with Xero

Once you have the numbers, it's easy to plug them into the NOPAT formula or calculate other financial metrics. Xero can help you bring it all together by tracking income, expenses, and everything else. You can automate a lot of the bookkeeping processes and create financial reports with just a few taps.