Differences Between NOPAT vs Net Income

If you’re an investor, you have two options. You can look at the net income as every investor does or you 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 by using the operating income.

How a business is doing operationally can be described better by NOPAT than 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 you as an investor should care?

NOPAT vs Net Income Infographics

Here are the top differences between NOPAT vs Net Income, it’s worth looking at the differences –

Key differences – NOPAT vs Net Income

There are many differences between NOPAT vs Net Income. Let’s have a look –

• NOPAT is a measure of operational efficiency for the 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 computing 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 having a glance 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 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 the 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.

NOPAT vs Net Income (Comparison Table)

 Conclusion

As an investor, it’s wise to not become a one-eyed deer. You will gain much more insight into a company when you look at all of the aspects of profitability of the company. First, you should look at all the four financial statements. Then you 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.

Recommended Articles

This has a been a guide to the top differences between NOPAT vs Net Income. Here we also discuss the NOPAT and Net Income differences with examples, infographics, and comparison table. You may also have a look at the following articles for gaining further knowledge in Accounting –

• Return on Average Capital Employed Formula
• Debt Coverage Ratio Formula
• Overhead Ratio Formula
• Retention Ratio Formula

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