Profit making is the main motto of every company. It works as an incentive to the entrepreneur for the risk taken by him, for running a business. It is like the fuel, which helps the business to survive, grow and expand in the long run. In business parlance, Net operating profit after tax, i.e. NOPAT, is the actual after-tax operating profit of the company or in simple terms, it is the earning of the company after interest and tax.
Net Income, on the other hand, refers to the actual profit earned by the company, in a financial year. It is calculated by deducting all taxes, interest, and expenses including non-cash ones like depreciation from the revenues. The line that differentiates the NOPAT and Net Income, is very thin and blur.
Content: NOPAT Vs Net Income
|Basis for Comparison||NOPAT||Net Income|
|Meaning||NOPAT is an abbreviation for Net Operating Profit After Tax.||Net Income is the residual income left with the company after deducting all expenses and costs.|
|Importance||Comparison between firms can be done.||Evaluating company's performance.|
|Calculation||NOPAT = Gross Profit - (Operating Expenses+Taxes)||Net Income = Net Profit - (Interest + Tax + Dividends to Preference Shareholders)|
Definition of NOPAT
Net Operating Profit After Tax, commonly known as NOPAT is the operating profit of the organization after the reduction of tax. It is a tool used by the entity to calculate the profitability. It helps the companies in reckoning profit if there is no debt financing. In the case of NOPAT, the company cannot claim tax benefit concerning interest for its debt financing. It can also be calculated as:
NOPAT = Operating Profit (1 – tax rate)
Definition of Net Income
The net earnings (positive amount) remained after deducting all expenses, interest, taxes and preferred stock dividend from Gross Profit is known as Net Income. It is also termed as bottom line or net increase in the shareholder’s equity. A certain percentage of net income is transferred to Reserves & Surplus, and the remaining part is distributed among the shareholders of the company.
On the contrary, if the amount remained after deducting above mentioned expenses is negative, it will be termed as Net Loss.
Key Differences Between NOPAT and Net Income
The difference between NOPAT and Net Income can be drawn clearly on the following grounds:
- NOPAT is used for making a comparison between firms while Net income is used to judge the performance of the company.
- Tax shield on the interest is not possible in case of NOPAT whereas Tax shield on interest is available in case of Net Income.
- NOPAT arrives after deducting tax from operating profit. On the other hand, Net Income arrives after deducting all expenses, profit, tax and dividends.
The company focusses on the calculation of Net Income for knowing the profitability of the company. Along with that, the stakeholders also easily understand the net income of the company, as on the basis of it, they will get the dividend. But NOPAT has its significance in calculating the income of the company if there is no debt financing as well as to compare two projects or firms. In this way, it primarily identifies the company’s earnings without interest.