How can I calculate the pre-tax result?

Operating profit before interest after tax

English: Net Operating Profit After Tax (NOPAT) & Earnings before Interest (EBI)

Definition: Profit (net profit plus interest) that the company would achieve if it were financed exclusively with equity.

This profit size can be calculated in two different ways:

On the one hand, it is possible to calculate the operating profit before interest after taxes by deducting taxes directly from EBIT (operating profit before interest and before tax). In this case, however, the tax expense is only estimated and does not reflect the effective tax expense. This is because the tax rate is normally only given on the EBT (operating profit before tax after interest). In this case, the operating profit before interest after tax is called NOPAT. If this method of calculation is chosen, it has an influence in particular if these values ​​are required for the valuation of companies. Since the tax expense is too high in this case (taxes were also calculated on the interest), a corrected (lower) cost of capital (WACCs) is then used.

On the other hand, there is the possibility of calculating the value "correctly". For this purpose, the interest is subtracted from the EBIT and the taxes are calculated on the EBT. Thus, the net profit is available and the interest can be added up again. If the operating profit before interest after taxes is calculated in this way, it is referred to as EBI (earnings before interest).

The NOPAT / EBI can be used, especially in the case of externally financed companies, to show how profitable the operative business was in the period under consideration without being distorted by the financing decision. Since the profit size depends on the accounting standard used, NOPAT is also affected and can therefore not be assessed without this additional information.

Abbreviation: NOPAT, EBI

Related terms:Financial metrics