What is NOPLAT?
NOPLAT (Net Operating Profit Less Adjusted Taxes) is a measure of a company’s operating profit after taxes, adjusted to remove the effects of a firm’s capital structure (debt versus equity) and certain tax timing items (for example, deferred tax effects). In practice, it shows how much profit the business’s core operations generate on an unlevered basis — i.e., what the company would earn if it had no interest expense.
Why NOPLAT matters
– Capital structure neutral: Because it’s based on operating profit (EBIT) and adjusted taxes, NOPLAT is used to compare operating performance across firms with different leverage.
– Valuation and performance metrics: NOPLAT is a key input for Economic Value Added (EVA), discounted cash-flow (DCF) models, M&A and LBO models, and free-cash-flow calculations.
– Management assessment: It isolates operating performance from financing effects, helping assess how well management uses operating assets.
Basic formula
A commonly used, simple form:NOPLAT ≈ EBIT × (1 − tax rate)
Investopedia notes that NOPLAT is EBIT after adjusting for deferred taxes and other tax items so that the tax charge reflects an unlevered firm’s taxes (i.e., taxes on operating earnings without debt tax shields). In practice, many analysts use NOPAT (Net Operating Profit After Tax) and NOPLAT interchangeably, but strictly speaking NOPLAT may include additional adjustments (deferred taxes, tax benefits tied to financing, etc.) to better reflect an unlevered tax position.
Worked example (Bed Bath & Beyond, fiscal years 2017–2018)
Using the Investopedia example (all numbers in USD thousands):
2018
– EBIT (Operating income): 761,321
– Income tax rate used: 35.57%
NOPLAT = 761,321 × (1 − 0.3557) = 761,321 × 0.6443 = 490,519
2017
– EBIT: 1,135,210
– Income tax rate used: 33.52%
NOPLAT = 1,135,210 × (1 − 0.3352) = 1,135,210 × 0.6648 = 754,633
These results show that, despite revenue remaining similar, higher operating costs reduced EBIT and therefore NOPLAT year-over-year.
Step-by-step practical guide to calculate NOPLAT from financial statements
1. Obtain the firm’s income statement and notes (10-K/10-Q for public firms).
2. Identify operating profit (EBIT):
– Start with operating income or EBIT (earnings before interest and taxes).
– If only net income is presented, add back interest expense and income tax expense to get EBIT.
3. Determine the appropriate tax rate to apply to operating profit:
– Simple approach: use the firm’s effective tax rate (income tax expense ÷ pre-tax income).
– Better approach for NOPLAT: compute an operating tax rate that excludes tax effects from financing and non-operating items. That may require:
– Removing tax benefit related to interest expense (if the firm reports tax benefit tied to interest),
– Removing taxes related to non-operating gains/losses,
– Adjusting for one-off tax items (e.g., tax effects of discontinued operations).
– If insufficient detail, use the statutory tax rate or the company’s consolidated effective tax rate as an approximation.
4. Compute basic NOPLAT:
– NOPLAT = EBIT × (1 − operating tax rate)
5. Make common adjustments (as needed):
– Deferred taxes: adjust EBIT tax charge for significant deferred tax items that are not related to core operations.
– Non-operating income or expense: exclude non-operating pre-tax income from the EBIT base; if non-operating items were included in reported operating income, remove them.
– Operating income from non-core invested assets: include the operating returns from invested capital that are part of ongoing operations; exclude irregular investment income.
– Capitalization of operating leases / ROU assets: if comparing firms or calculating invested capital, consider capitalizing operating leases (IFRS/US GAAP landmine) and adjusting taxes accordingly.
– One-time items and restructuring charges: remove or normalize for recurring operating performance analysis.
6. Reconcile to cash flow (if needed):
– Use NOPLAT as the starting point for calculating free cash flow (FCF):
FCF = NOPLAT + depreciation & amortization − change in working capital − capital expenditures (plus/minus other operating cash adjustments).
7. Document and disclose your adjustments:
– List what you changed and why (deferred tax adjustments, one-offs, tax rate choice) — this is crucial for reproducibility and comparability.
How NOPLAT is used in valuation and performance measurement
– Economic Value Added (EVA): EVA = NOPLAT − (Invested Capital × WACC). Positive EVA indicates the company is earning returns above its overall cost of capital.
– Discounted Cash Flow (DCF): Analysts often project NOPLAT and convert it into free cash flow (by adding back non-cash charges and subtracting reinvestment needs) to discount back at WACC.
– M&A and LBO models: NOPLAT helps determine sustainable operating cash generation independent of financing structure.
– Cross-company comparisons: Because NOPLAT neutralizes tax and interest effects, it’s useful for comparing operational efficiency across firms and industries.
Common pitfalls and limitations
– Tax rate selection: Using the wrong tax rate (e.g., statutory vs. effective vs. adjusted operating tax rate) can materially distort NOPLAT.
– Deferred taxes and one-offs: Failure to adjust for deferred tax items or one-off tax benefits (or charges) can misstate the unlevered tax expense.
– Non-operating items: If operating income includes extraordinary or non-operating gains, NOPLAT will overstate operating profitability unless these are removed.
– Leasing and capitalization: Differences in accounting for leases, R&D, and capitalization policies can make firm comparisons harder unless you normalize these.
– Interchangeability with NOPAT: Practitioners often use NOPAT and NOPLAT interchangeably; be explicit about definitions and adjustments in your analysis.
Quick reference checklist for an analyst
– Collect: latest income statement and tax footnotes (and prior-year comparables).
– Compute EBIT (confirm what management calls operating income).
– Choose tax rate (document whether effective, statutory, or adjusted operating tax rate).
– Apply formula: NOPLAT = EBIT × (1 − tax rate).
– Make adjustments: deferred taxes, non-operating items, one-offs, lease capitalization (if applicable).
– Use NOPLAT as input for EVA, FCF, DCF, or comparative performance analysis.
– Document all adjustments and assumptions.
Sources and further reading
– Investopedia — NOPLAT: https://www.investopedia.com/terms/n/noplat.asp
– U.S. Securities and Exchange Commission — Bed Bath & Beyond, Inc., Form 10-K (FY ended Feb. 25, 2017 and March 8, 2018) — for the example numbers cited.
– Accounting Tools — definitions for EBIT, operating income, and Economic Value Added
– Tally Solutions — explanation of NOPAT (useful background on operating profit after tax)
If you’d like, I can:
– Walk through a NOPLAT calculation for a specific company (if you provide its income statement), or
– Build a simple Excel template that computes NOPLAT, FCF and EVA with fields for common adjustments.