NOPAT is the after-tax operating cash generated by the business, excluding unusual losses and gains, financing costs, goodwill and other non-cash items. It can be calculated two mathematically equivalent ways.
NOPAT is also the numerator in our ROIC calculation, the primary driver of economic earnings.
Figure 1: Formulae for NOPAT
Source: New Constructs, LLC
Below are the primary accounting distortions in reported financial statements that require economic translation and adjustment for the NOPAT calculation.
- Remove asset write-downs hidden in operating expenses
- Remove non-operating expenses hidden in operating earnings
- Remove non-operating income hidden in operating earnings
- Add back change in reserves
- Remove income and loss from discontinued operations (except for REITs)
- Add back implied interest for the present value of operating leases
- Adjust for non-operating tax expenses
- Historical adjustments: Add back goodwill amortization prior to 2002 and include employee stock option expense prior to 2006
- Remove reported non-operating items
Here are details on the numerous footnotes adjustments to Invested Capital to ensure the best ROIC in the business.
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