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8 November 2012

NOPAT: Definition And Formulae For Net Operating Profit After-Tax And NOPAT Margin

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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

NOPAT_operatingAndFinancingApprochesSource: New Constructs, LLC

Below are the primary accounting distortions in reported financial statements that require economic translation and adjustment for the NOPAT calculation.

  1. Remove asset write-downs hidden in operating expenses
  2. Remove non-operating expenses hidden in operating earnings
  3. Remove non-operating income hidden in operating earnings
  4. Add back change in reserves
  5. Remove income and loss from discontinued operations (except for REITs)
  6. Add back implied interest for the present value of operating leases
  7. Adjust for non-operating tax expenses
  8. Historical adjustments: Add back goodwill amortization prior to 2002 and include employee stock option expense prior to 2006
  9. 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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5 thoughts on “NOPAT: Definition And Formulae For Net Operating Profit After-Tax And NOPAT Margin

  1. Re: your formula for NOPAT. After summing to arrive at EBIT, you than add back EBITA. Isn’t this double counting? Wouldn’t the final answer for NOPAT be grossly exaggerated and meaningless? Where am I confused? Thks

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