When projecting operating profit, which component is typically subtracted to arrive at NOPAT?

Net Operating Profit After Tax (NOPAT) measures a company's profitability on an operating basis, factoring in the impact of taxes, but excluding non-operating income and expenses. When calculating NOPAT, the key step is to start with the operating profit (often referred to as EBIT or Earnings Before Interest and Taxes) and subtract taxes that are applicable to that operating profit.

Taxes are subtracted because NOPAT is meant to reflect the profit generated from core operations after accounting for the tax burden the company faces. This gives a clearer picture of the operational efficiency and profitability of the business, as it ignores the financing and investment decisions that may distort financial performance.

In contrast, while amortization costs are related to non-cash expenses, interest expenses pertain to financing costs and capital expenditures represent outflows for acquisitions of physical assets, none of these directly influence the calculation of operating profit after tax in the context of NOPAT. Therefore, subtracting taxes is the essential step to accurately assess NOPAT, aligning it closely with the core operational performance of the business.