Net Profit After Tax

Net Profit after Tax (NPAT) is one of the more important figures that a company makes public. just like Earnings before net interest and tax (EBIT), NPAT is one of the figures that a fundamental analyst or value investor would consider before making an investment decision.

The NPAT is calculated from taking the operating profit after income tax, before the significant (or abnormal) and extraordinary items, and without deducting the Outside Equity Interest. When you have outside investors who own part of one of the company’s subsidiaries, they are classed as outside equity interests and are included in the NPAT amount.

The NPAT can sometimes be found in the statement of financial performance (previously known as the Profit and Loss Statement). Many companies will just list one figure for profit after tax and this will include significant items.

The most contentious issue surrounding company’s calculation and subsequent documenting of NPAT is the manner in which tax has been accounted for with the significant items. Significant items are one-off occurrences that must be accounted for but will most likely never happen again. Often they have a substantial affect on the company’s bottom line with earnings and profit, and the tax effect can also have a significant impact on the final figures. Under recent changes, companies do not have to disclose the tax effect on the significant items in their statement of financial performance.

If you are wary of the way in which this has been handled by a company or this has not been documented, some alternative approaches include to ignore the effect of income tax on the significant items, to read the notes to the financial reports and ascertain whether tax is applicable for each item listed as significant, or to estimate the tax expense by multiplying the total significant items amount by the company tax rate.

When considering a company’s financial reports, it is prudent to realise that many traditional investors yearn for earnings and net profit and the potential for further profit. Many believe that this is the most important aspect of a company to consider when buying shares, and obviously this can generate demand for shares.

Furthermore, often hand in hand with profits are dividend payments and the more profit a company makes, the more money is made available for the board of directors to declare dividends.

Unlike many fundamental pieces of data, the NPAT can be considered in isolation, and often is. However, it can be combined with other data to form a more complete assessment or simply the trend of the NPAT over time could be assessed and a conclusion drawn from that. One of the greatest strengths of a company is the ability to generate profits and provide above average returns to shareholders.