hello everyone hi welcome to the channel of Wallstreetmojo friends today we
are going to learn a to toll on NOPAT vs. net income no pad is basically your
net operating profit after tax so let's get into this what exactly we are going
to discuss over here see if you are 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 the net income and the NOPAT that is your net operating profit after net
operating profit after tax right so how does this net operating profit after tax
has been calculated in the net income first the net income is calculated by
deducting all the expenses incurred during the oh and that includes all the
non-cash expenses that includes your depreciation also so your net income
includes all the expenses that includes non-cash but if we talk about no part
over here no pad on the other hand is calculated by using operating income
this is really very important now how a business is doing
operationally can be described better by no pad then the net income even if there
is a key difference between net income and Nopat
looking at each of them would give the investor the clarity that they need to
decide whether to invest in a company or not so in this particular tutorial we
are going to look at top differences between NOPAT versus net income and why
you as an investor should care so let's discuss this difference between the
NOPAT and net income the first and the foremost thing as you can see NOPAT is
calculated on operating income that is all those which are non recurring in
nature won't be included in this to find out the operating efficiency of the
company net income however is calculated by deducting
all the expenses that includes your non-cash expenditures non-cash revenues
so it'd give me anything now the second so the first was the inherent meaning
the second that we are going to discuss is the application of the same over here
and NOPAT is used to understand the operational efficiency over here it was
operational operating efficiency of the company operational efficiency without
the leverage that is we are not going to really include the interest portion so
net operating profit after tax so interest without the leverage net income
is the most common measure of profitability of the company after
deducting everything you get your net income is interest expense adducted no
that's why it has been said over here operational efficiency without leverage
and over here with leverage so that's why no interest is deducted over here
and yes interest is deducted net income is after everything tax all the
operating expenses income let it be tax let it be interest let it be depreciation
everything is deducted and then after you get your net income the next
difference importance NOPAT doesn't take interest expense on debt or on debt
into account so that's what we discussed about so the importance is that the
interest expense is not taken into consideration so we will be able to see
the DSCR ratio over here we'll be able to analyze for the debt holders that how
far the company will be able to repay the the principal plus interest
so NOPAT doesn't take interest expense on debt into account net income is
deducted by deducting every possible expense from the revenue no specific use
to no pad is used for the investors and over here net income is like for
everyone it's like come everyone is invited over here it's like shareholders
investors external stakeholders and so on and so forth but NOPAT is
specifically useful for the investors now how it has been calculated if we see
NOPAT is calculated by the operating income that is your earning
before interest and tax into one minus tax that
you are not you are basically doing a post-tax operating income so net
operating profit after tax but interest is not deducted so operating income is
what you are earning before interest and tax and post that you are just
multiplying one minus tax that is your post tax income without deducting
interest that is an open your net income is your net profit less the interest
expense less the taxes so net profit this is let's say this is your
earning before interest in tax so if you deduct interest you get earning before
tax that is a EBT if you deduct tax then you get earning after tax that is your
Nopat or EAT and then you deduct dividend paid to the preference shareholders pose
that if there is dividend that is paid to equity shoulders and that is net
income now used to compare the performances between the two forms
usually the forms do that and over here to
evaluate the overall company's performances now
the stake leverage into account no we have already understood yes
no interest yes interest now let's understand the key differences in NOPAT
versus net income see there are many differences between no pattern net
income but let's have a look at the key differences see NOPAT as we know that
is a measure of what operating efficiency we now know very well for the
investor if investor know that net income they can ascertain NOPAT easily
but if they know NOPAT to a certain net income they need not to know the
interest rate on the debt second while computing the NOPAT interest expense on
debt are not deducted while asserting net income interest expense on debt are
deducted if we talk about no pad no fat helps the investors make comparison
among the forms and operating efficiency net income helps the investors get
profitability ratios of the forms but having a glance at net income does not
create value since to find out net income even non-cash expenses like
depreciation is also deducted so that was your third point the fourth one in
case of no pad the actual sales over here I mean to say the actual tax
expenses are calculated but in net income the tax expenses get
significantly reduced due to the effect of the leverage now looking at the one
ratio will not offer the investor sufficiently so each investor should
look at both the NOPAT and the net income to get the idea of the
profitability actual taxes to be paid interest expense on debts in the effect
only leverage on the profitability so you can see calculating the NOPAT is no
brainer on the other hand ascertaining net income needs a bit more time and
calculation so after learning this we can make a final conclusion that as
an investor it's wise to not become a 1id
beer you will gain much more insight into a company when you look at all the
aspects of the profitability of the company so first you should look at all
the four financial statements then you should look at the net income NOPAT net
cash in flows and outflows net revenues return on total assets return on equity
and return on capital investor and so on and so forth
thank everyone
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