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http://TheValueatRisk.blogspot.com
 
October
 
19,
 
2009
 
Evaluate
 
Operating
 
Performance:
 
Net
 
Operating
 
Profit
 
After
 
Taxes
 
(NOPAT)
 
Although I'm partial towards the use of Operating Cash Flow (OCF) as a primary basis forperformance measurement, investors should nonetheless be familiar with Net Operating ProfitAfter Taxes (NOPAT). NOPAT is completely derived from the income statement, subjectingitself to the usual non-cash adjustments dictated by GAAP. However, NOPAT is useful because,as the name implies, it is strictly a measure of operating performance.Calculation of NOPAT is relatively straightforward, you're simply multiplying Income FromOperations Before Taxes by the corporation's effective tax rate. To calculate the tax rate, divideincome tax expense by net income before taxes(NIBT); make sure you place NIBT, also knownas Pretax Income in the denominator, and not Operating Income. Once you've determined thetotal taxes owed, you just subtract it from Operating Income to arrive at NOPAT. The two stepprocess is delineated below:Tax Rate = Net Income Before Taxes / Income Tax ExpenseNet Operating Profit After Taxes = Income From Operations Before Taxes X (1-Tax Rate)*Note that a company's annual reports and 10-Q's will not always show a neatly constructedincome statement that spoon feeds you the Operating Income, Pretax Income, and Income TaxExpense lines. GAAP doesn't require the income statement to be constructed in any special sortof way, thus you may have to occasionally deploy some common sense. Nearly all of the timehowever, websites like Yahoo!Finance and (if you have a subscription) S&P's NetAdvantage willgo ahead and break out the necessary line items. The point is, pay attention.
 
http://TheValueatRisk.blogspot.com
 
October
 
19,
 
2009
 
I'll use Hewlett-Packard Company (HPQ) to illustrate an example calculation of NOPAT:HPQ NOPAT - Year Ended October 31st 2009Tax Rate = $2144M / $10,473M= 20.47%Net Operating Profit After Taxes = $10,802M X (1-.2047)= $10,802M X 0.7952=$8,590MHewlett-Packard's NOPAT of $8590M compares with net income of $8329M for fiscal year2008; at only 3% less than NOPAT, 2008 net income is indicative of only a modest amount ofinterest expense for the year ($329M). The disparity between NOPAT and net income isn'talways so minimal, as can be seen in the chart below:General Electric (GE)'s large disparity between NOPAT and net income is an obvious firstobservation to make. The primary driver of this phenomenon is the $26,209M worth of interestexpense incurred by the company during 2008. The second result of such a massive interestexpense is that GE's 2008 effective tax rate was only 5.3% (interest is deductible). The
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