NOPAT Vs Net Income

The key difference between NOPAT vs. Net Income is that NOPAT refers to the net operating profit after tax, where it calculates the net earnings of the business before deducting the interest charges but after directly deducting the tax on such operating income earned to see the business actual operating efficiency as it does not take into account the tax benefit of existing debt.

In contrast, net Income refers to the business's earnings that are earned during the period after considering all the expenses incurred by the company during that period. As an investor, it’s wise not to become a one-eyed deer. You will gain much more insight into a company when you look at all of the aspects of the profitability of the company.

First, the investor should look at all four financial statements. Then they should look at net income, NOPAT, net cash inflow/outflow, net revenue, return on total assets, return on equity, return on capital invested, etc.

Having a look at all of these statements and ratios will give a solid idea about whether to invest in a particular company or not.

From the point of view of an investor, they have two options. They can look at the net income as every investor does, or they can become wise and check both – net income and NOPAT (net operating profit after tax).

• Net income is calculated by deducting all the expenses incurred during the year (including the non-cash expenses like depreciation and also interests & taxes) from the revenue of the company.
• NOPAT, on the other hand, is calculated using the operating income.

How a business operates operationally can be described better by NOPAT than by Net Income. Even if there's a key difference between net income and NOPAT, looking at each of them would give the investors the clarity they need to decide whether to invest in a company or not.

In this article, we look at the top differences between NOPAT vs. Net Income and why as an investor, they should care?

Here are the top differences between NOPAT vs. Net Income; it’s worth looking at the differences. The infographics will help in understanding them as well as keeping the main points of difference in mind because the table below summarizes them very well.

There are many differences between the NOPAT vs. Net Income. Going through them in details pointwise will help in understanding them and differentiating easily. Let’s have a look –

• NOPAT is a measure of operational efficiency for investors. If investors know "net income," they can ascertain NOPAT easily. But if they know NOPAT, to ascertain “net income,” they need to know the interest rate on debt.
• While calculating NOPAT, interest expenses on debt are not deducted. While ascertaining net income, interest expenses on debt are deducted.
• NOPAT helps investors make a comparison among firms on operational efficiency. Net income helps investors get a profitability ratio of the firm (but looking at net income doesn’t create value since to find out “net income,” even non-cash expenses like depreciation is also deducted).
• In NOPAT, the actual income tax expenses are calculated. But in net income, tax expenses get significantly reduced due to the effect of leverage.
• Looking at one ratio will not offer the investors sufficiency; each investor should look at both NOPAT and net income to get an idea of profitability, actual taxes to be paid, interest expenses on debt, and the effect of leverage on profitability.
• Calculating NOPAT is a no-brainer. On the other hand, ascertaining “net income” needs a bit more time and calculation.

This has been a guide to what is NOPAT Vs Net Income. We explain the differences with the help of infographics, key differences and comparative table. You may also have a look at the following articles for gaining further knowledge in Accounting –

• Revenue vs. Net Income
• Calculate Net Income
• Windfall Profit
• Operating Income vs. Net Income