Profit after tax (pat)

Profit After Tax refers to the amount that remains after a company has paid off all of its operating and non-operating expenses, other liabilities and taxes. This profit is what is distributed by the entity to its shareholders as dividends or is kept as retained earnings in reserves.

What Is an After-Tax Profit Margin?

Profit After Tax is an important measure of the company, since it shows the actual amount that a company is making in that operating year. It shows the cost and the cash earnings of the company, which then determines the operational efficiency and performance.
Often analysts pit companies’ profit after tax against other companies in the same market segment to compare the health of businesses. This figure is also used in other ratios and complex equations such as profit-after-tax margin, which gives a more objective and detailed look of the company. It is significant in showing the competency of a business in being able to turn its revenue into profits.

Highlights of Profit After Tax

It had many other names such as Net Operating Profit After Tax (NOPAT) or simply Net Profit After Tax.
Profit After Tax is often an effective figure used to calculate ratios which measure the profitability and efficacy of the company
Profit After Tax margin uses PAT to show how any change in the value will manipulate the stock prices when the company is publicly listed.
If the company is listed, Profit After Tax is calculated on a per share basis too and it appears on the income statement of the company.
If the PAT value is high, it shows high efficacy and vice versa.
PAT is directly proportional to the dividends paid to equity shareholders; more profit after tax, better dividends are paid.
When the profit after tax is negative, it is considered as a loss and therefore it is not taxable. It makes the company unsustainable during a loss period.

What an After-Tax Profit Margin Indicates

A high after-tax profit margin generally indicates that a company is being run efficiently, providing more value in the form of profits to shareholders. The after-tax profit margin alone is not an exact measure of a company’s performance or determinant of the effectiveness of its cost control measures. However, taken along with other performance measures, it can help create a useful picture of the overall health of a company.

This financial measure communicates how much income a company is earning per dollar of sales. Some industries inevitably have considerable costs. As a result, their margins may be low. However, that does not equate to poor control of costs. For this reason, it is important for investors to compare a company’s after-tax profit margin only with other companies in its industry rather than with companies in general.

How to Calculate an After-Tax Profit Margin

The formula for calculating a company’s after-tax profit margin is simply:

$After-tax profit margin = net sales$ $net income$

Net income is the company’s total income minus taxes, expenses, and the costs of goods sold (COGS). It is often referred to as the bottom line because it is the final line item on an income statement. Expenses include wages, rent, advertising, insurance, etc. Costs of goods sold are the costs associated with the production of products. Such costs include, but are not limited to, raw materials, labor, and overhead.

Net sales, the other component for calculating after-tax profit margins, is the total amount of gross sales after subtracting returns, allowances, and discounts. Also factored in net sales are deductions for damaged, stolen, and missing products. The net sales figure can be a good indicator of what a company expects to attain in sales for future periods. It is an essential factor in forecasting, and it can also help identify inefficiencies in loss prevention.

After-Tax Profit Margin vs. Pre-Tax Profit Margin

The after-tax profit margin is the net profit margin, including taxes. The pre-tax profit margin is similar, except that it excludes taxes. The pre-tax profit margin is useful when comparing companies that have meaningfully different tax rates, such as those of different sizes and scale, or those operating in different countries and tax jurisdictions.

For example, corporations in Pennsylvania pay a top marginal income tax rate to their state of 8.99%, while those in neighboring West Virginia, pay a top marginal rate of 6.50%, according to the Tax Foundation. In addition to income taxes, companies may be subject to other state taxes, which can also vary from one state to another.Pre-tax profit margin can also be more useful in comparing the same company’s performance over time, especially if tax rates or penalties have varied during that period. The reasoning behind using the pre-tax profit margin is that tax payments have little to do with the efficiency of a company because they are not something that the company has much control over.

FAQs

What Is a Good After-Tax Profit Margin?

What constitutes a “good” after-tax profit margin or net profit margin can vary widely from industry to industry.

What Is Operating Profit Margin?

Operating profit margin is another measure of a company’s performance. In contrast to net profit margin or after-tax profit margin, it is calculated by dividing a company’s operating income by its revenue. Operating income is revenue minus operating expenses, but doesn’t include any other, non-operating expenses, such as interest and taxes.

What Is Gross Profit Margin?

A company’s gross profit margin is calculated by dividing its gross profits by its revenue. Gross profit, in contrast to operating profit or net profit, is calculated by subtracting its cost of goods sold (COGS), but not any other operating or non-operating costs, from its revenue.

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