Calculating NOPLAT: Understanding, Calculation, and Application in Finance
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Summary:
Net Operating Profit Less Adjusted Taxes (NOPLAT) stands as a critical financial metric, revealing a company’s operational efficiency by assessing earnings before interest and taxes (EBIT) after adjustments for deferred taxes. This article meticulously explores NOPLAT, unraveling its calculation, significance in financial models, and its role in evaluating a company’s core operations. With a focus on Bed Bath & Beyond Inc.’s NOPLAT example, we delve into pros, cons, and key takeaways, providing an extensive understanding of this indispensable metric.
What is net operating profit less adjusted taxes (NOPLAT)?
Net operating profit less adjusted taxes (NOPLAT) is a financial metric that offers a nuanced perspective on a company’s operational efficiency. Calculated by adjusting earnings before interest and taxes (EBIT) for deferred taxes, NOPLAT stands out for excluding the impact of tax debt, providing insights into un-leveraged profits. This metric, essential in financial modeling, factors in the costs and tax benefits of debt financing, ensuring a comprehensive evaluation of a company’s true operational performance.
Understanding net operating profit less adjusted taxes (NOPLAT)
NOPLAT serves as a robust tool for evaluating a company’s economic profit by focusing on un-leveraged profits. By excluding the effects of a firm’s capital structure, it eliminates the monetary costs of equity and debt from its calculation. This metric plays a key role in calculating Economic Value Added (EVA), comparing economic profit to the total cost of capital.
Analysts and investors leverage NOPLAT to scrutinize a company’s core operational profits. It adjusts for taxes related to core operations while adding back overpaid taxes during the accounting period. Unlike net income, NOPLAT excludes income from non-operating assets, maintaining a focus on operational efficiency.
Operating income, the foundation for NOPLAT calculations, represents a company’s profit before interest and taxes. This choice ensures an unbiased assessment of operational efficiency, as debt servicing’s negative impact on a firm’s bottom line is removed from consideration.
Example of NOPLAT
To illustrate NOPLAT’s application, let’s analyze Bed Bath & Beyond Inc.’s fiscal years ending March 3, 2018, and Feb. 25, 2017. The calculation involves adjusting operating income by multiplying it with (1 – tax rate).
(USD in thousands)
2018
2017
- Revenue: $12,349,301 / $12,215,757
- Operating Income (EBIT): $761,321 / $1,135,210
- Interest Expense: $65,661 / $69,555
- Income Tax: $270,802 / $380,547
- Net Income: $424,858 / $685,108
- NOPLAT Calculation: $761,321 x (1 – 0.3557) = $490,519 / $1,135,210 x (1 – 0.3352) = $754,633
The decrease in operating profits from 2017 to 2018 resulted in a decrease in NOPLAT for Bed Bath & Beyond, reflecting the impact of operational changes on this crucial metric.
Frequently asked questions
Is NOPLAT the same as net income?
No, NOPLAT differs from net income. While net income includes all profits and losses, NOPLAT focuses on a company’s operational efficiency by excluding the impact of tax debt.
How frequently should companies use NOPLAT in their financial analysis?
The frequency of using NOPLAT depends on a company’s financial goals and the complexity of its operations. It is commonly employed in detailed financial modeling scenarios like M&A, DCF, and LBO, where precise cash flow calculations are crucial.
Does NOPLAT consider non-operating assets in its calculation?
No, NOPLAT excludes income generated from non-operating assets. It specifically concentrates on a company’s core operational profits after adjusting for taxes related to those operations.
Can NOPLAT be used for all types of businesses?
While NOPLAT is a valuable metric for various businesses, its suitability depends on the industry and the nature of a company’s operations. It is particularly useful for companies with a significant reliance on debt financing.
Key takeaways
- NOPLAT is a vital metric for evaluating operational efficiency by excluding the impact of tax debt.
- Used in financial models like M&A, DCF, and LBO for accurate free cash flow calculation.
- Provides insights into a company’s core operational profits, excluding non-operating assets.
- Operating income is the basis for NOPLAT, ensuring an unbiased assessment of operating efficiency.
- NOPLAT’s application varies across industries, making it particularly useful for companies reliant on debt financing.
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