Definition: Net operating profit less adjusted taxes (NOPLAT) is a financial ratio that calculates a firm’s earnings before interest and taxes (EBIT) adjusted for the tax expenses of debt financing. Investors use this metric to calculate free cash flow before a merger or acquisition.
What Does NOPLAT Mean?
What is the definition of NOPLAT? Analysts calculate NOPLAT using the firm’s operating income. The idea is to have a clear picture of the firm’s operating efficiency and evaluate the profits that the firm generates by its core business. Then, analysts make the proper tax adjustments to reflect the unleveraged profits of the firm without taking into account the effects of tax debt.
NOPLAT is broadly used in the discounted cash flow (DCF) model and the leveraged buyout (LBO) model because it provides an accurate calculation of the free cash flowsthat investments can generate. It is also used for the calculation of the Economic Value Added (EVA) because NOPLAT minus the cost of debt and the cost of equity is equal to the economic profit.
Let’s look at an example.
Example
Alexis is an accountant at Company ABC, a railroad manufacturing company, and he is asked to calculate the NOPLAT for the fiscal years 2014 and 2015. Alexis wants to compare the two figures and identify an increase or a decrease in the company’s net operating profit less adjusted taxes.
Alexis prepares the following table:
Alexis calculates an increase of 10.15% YoY in the company’s NOPLAT as a result of an increase in revenues of 6.77% YoY that has generated a higher operating income in 2015. The increase in the selling, general, administrative expenses and labor expenses by 3.90% YoY and 8.06% YoY, respectively, had no effect on the operating income’s increase, thereby generating a higher NOPLAT in the fiscal year 2015.
Based on the NOPLAT calculations, Alexis can have a clearer view of the company’s operating efficiency without the debt leverage of short-term loans and interest payments.
Summary Definition
Define NOPLAT: Net operating profit less adjusted taxes is a financial metric that management and investors use to calculate the free cash flow or profit after taxes are taken into account.
