When it comes to financial report season, there are so many metrics and acronyms to get your head around. COGS, EBIT, EBITDA, GP, NP….. WTF?!

Learning these terms can feel like picking up Latin for the first time (and every school kid knows that that was never fun!).

One of the fun acronyms is called NPAT - or Net Profit After Tax.

Ever heard someone talk about a company’s "bottom line"? Well, that’s NPAT - the figure on an income statement and represents the actual profit that a company has earned.

And NPAT is one of the most important metrics used to measure a company’s profitability.

Why do we care about NPAT? 

Net Profit After Tax (NPAT) is a key financial metric because it indicates the health of the company. 

This is the measure of how well a company has performed over a period of time, which includes all operating costs (rent, wages, general expenses), interest, taxes, and other deductions.

The sneaker store

Say you own a sneaker store, and you’ve made $100,000 in sales over the past three months.

This is called your revenue.

But it actually costs you around $20,000 to make those sneakers. So your gross profit is:

But that’s not all. You also had to pay some operational costs like rent and your employees’ wages. That cost is $40,000, which brings your net profit to:

In this simple example where there are no other tax offsets or deductions, your net profit is $40,000. 

And this will be the amount of money that you pay tax on.

If the ATO charges your company 27.5% in company taxes, your sneaker store’s net profit after tax (NPAT) is:

Why does NPAT matter for a company?

NPAT is often used by investors, analysts, and even employees to assess the financial health of a business.

If you’ve got a consistently high NPAT, it is usually a good indicator that the company is well-managed and a safe investment.

And this means that you can use the company’s profits in a whole new set of ways. 

You may decide to:

• reinvest the profits to grow the business,
• pay out the profits to shareholders as dividends
• use the profits to repurchase shares in the company from investors

But that’s not all. NPAT is also used as a benchmark because it allows you to compare your financials against competitors and industry averages. 

So now you can start dropping ‘NPAT’ and ‘bottom line’ to your mates like a seasoned investor.

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