NOPAT stands for Net Operating Profit after tax; it is usually the operating profit less tax. It is used by organizations to calculate profitability. It is useful in estimating the company's profit in cases where the company has not used debt financing when it is used the company cannot claim any tax benefits of debt financing interest. It is used to compare the performance of different companies ( Romi, & Longing, 2017).
NOPAT= Operating profit (-tax rate)
On the other hand, net income is the amount that remains after deducting interest, taxes, all expenses and preferred stock dividends from the total earnings. It could also be referred to as the net increase or bottom line in the equity of shareholders. A given percentage of net income is kept in the reserves, and surplus account and the rest is divided amongst the company’s shareholders. If the residual amount after deducting expenses is negative, it will be Net Loss. Net profit is used to gauge the company’s performance. In this case, the company may claim tax benefits from debt financing interest ( Stucke, 2016) .
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Net income is useful for judging the company’s performance since it can easily be understood by the stakeholders.
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Monsanto Co., economic profit calculation |
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USD $ in millions |
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12 months ended |
Aug 31, 2015 |
Aug 31, 2014 |
Aug 31, 2013 |
Aug 31, 2012 |
Aug 31, 2011 |
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Net operating profit after taxes (NOPAT) |
2,367 |
2,639 |
2,750 |
2,253 |
2,263 |
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Cost of capital |
11.71% |
12.23% |
13.29% |
13.18% |
12.18% |
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Invested capital |
18,327 |
16,260 |
15,770 |
14,553 |
14,653 |
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Economic profit |
221 |
651 |
654 |
334 |
354 |
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Source: Based on data from Monsanto Co. Annual Reports |
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Economic valued added also known as economic profit is the difference between costs and revenue, where the price includes that of capital and expenses.
The following are the calculations of the economic profits for Monsanto of a period of 5 years
Year 2015
Economic profit = NOPAT – Cost of capital × Invested capital = 2,367 – 11.71 % × 18,327= 221
Year 2014
Economic profit= 2,639 – 12.23 % × 16260= 651
Year 2013
Economic profit= 2,750 – 13.29 % × 15770= 654
Year 2012
Economic profit= 2,253 – 13.18 % × 14553= 334
Year 2011
Economic profit= 2,263 – 12.18 % × 14653= 354
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Monsanto Co., income tax expense (benefit), continuing operations |
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USD $ in millions |
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12 months ended |
Aug 31, 2015 |
Aug 31, 2014 |
Aug 31, 2013 |
Aug 31, 2012 |
Aug 31, 2011 |
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U.S. federal |
393 |
675 |
648 |
432 |
301 |
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U.S. state |
43 |
69 |
65 |
52 |
49 |
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Outside the United States |
231 |
408 |
410 |
305 |
310 |
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Current |
667 |
1,152 |
1,123 |
789 |
660 |
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U.S. federal |
-109 |
-91 |
41 |
159 |
252 |
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U.S. state |
-7 |
-2 |
-2 |
1 |
15 |
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Outside the United States |
144 |
-195 |
-84 |
-34 |
-26 |
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Deferred |
28 |
-288 |
-45 |
126 |
241 |
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Income tax provision from continuing operations |
695 |
864 |
1,078 |
915 |
901 |
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Source: Based on data from Monsanto Co. 10k Reports |
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Economic profit is used to measure the performance of a corporate and is usually computed by multiplying the invested capital with the spread between return on investment and total cost of capital.
The economic profit of Monsanto shows an increase from 2011 to 2014, but then it fell abruptly in 2015. From the table above it is shown that Monsanto co. has been enjoying tax benefits and hence should keep borrowing to finance their operations. The table shows that the company reaps high tax benefits for all since 2011 with the highest received in the year 2013 ( Grant, 2016).
References
Grant, R. M. (2016). Contemporary strategy analysis: Text and cases edition . John Wiley & Sons.
Romi, A. M., & Longing, S. D. (2017). Evidence from disclosures by US-listed companies. The Business of Bees: An Integrated Approach to Bee Decline and Corporate Responsibility , 12 .
Stucke, M. E., & Grunes, A. P. (2016). An Antitrust Review of a Bayer-Monsanto Merger. The Konkurrenz Group: Washington, DC, USA .
