What is NOPLAT?
NOPLAT stands for “net operating profit less adjusted taxes” and represents a company’s operating income upon adjusting for taxes.
How to Calculate NOPLAT (Step-by-Step)
A company’s net operating profit less adjusted taxes (NOPLAT) calculates a company’s operating income (i.e. EBIT) after adjusting for taxes.
By starting with EBIT – a capital structure-neutral financial metric – NOPLAT is not affected by the net interest expense of a company.
Interest is a non-core part of a company’s operations and is impacted by discretionary decisions surrounding debt and equity financing, i.e. the proportion of debt within the company’s total capitalization.
When the capital structure decisions unique to the specific company are removed, the metric becomes better suited for the following:
- Projecting Future Performance from Core Operations
- Comparisons to Comparable Peer Group
- Tracking Operating Efficiency with Return on Invested Capital (ROIC)
Once the operating income is calculated, the next step is to tax-affect it using the company’s tax rate.
The rationale for not using the actual tax expense value is because interest – or more specifically, the interest tax shield – impacts the taxes owed.
Since NOPLAT is attempting to reflect the taxes owed on core operations, as opposed to non-core operations, we multiply EBIT by one minus the tax rate.
In the final step, adjustments are made to NOPLAT to factor in any existing deferred taxes, i.e. to add back the taxes overpaid (or underpaid). Deferred taxes are NOT actually paid in cash, so these non-cash charges are treated as an add-back.
Learn More → EBITDA Quick Primer
NOPLAT Formula
The formula for calculating NOPLAT equals operating income (EBIT) subtracted by adjusted taxes, with a positive adjustment for any change in deferred taxes.
Where:
- Adjusted Taxes = Income Tax Provision + Interest Tax Shield + Taxes on Other Non-Operating Income / (Expense)
NOPLAT vs. NOPAT: What is the Difference?
NOPLAT and NOPAT are often used interchangeably, although the NOPAT metric is far more prevalent in practice.
NOPLAT is taught in the Chartered Financial Analyst (CFA) exam curriculum and also appears in the book “Valuation: Measuring and Managing the Value of Companies” published by McKinsey.
For the most part, NOPAT and NOPLAT are conceptually very similar, except the latter takes into account deferred tax liabilities (DTLs) or deferred tax assets (DTAs) directly.
But do note that NOPAT does not necessarily neglect those DTLs / DTAs entirely, i.e. the projected tax rate assumption could be indirectly normalized with consideration for the company’s deferred taxes.
In short, if a company carries no deferred taxes, then NOPAT will be equal to NOPLAT.