Definition
 

Profit After Tax (PAT) is the amount that remains after the company has paid all its expenses, liabilities, and operating and non-operating expenses.

Description

In a company, a profit is distributed amongst all its shareholders as dividends. At times, it is also kept as a reserve for future expansion and other expenses.

Profit after tax is the actual amount the company generates in a financial year. It shows the financial health of the company. The PAT amount shows the cash and the cost that gives the operational efficiency of the company.

Profit after tax computes the operational efficacy of the company and is calculated on a per share basis.

Net Profit After Tax Formula= Net Profit Before Tax(PBT)  -  Income Tax Expense

• PAT is directly proportional to the dividends that are paid to the shareholders. 
• If PAT is negative, it shows that your company is in loss and vice versa

Importance to know Profit After Tax

This is why knowing Profit After Tax is important:

Aids in financial assessment 

Profit After Tax (PAT) is a crucial indicator of a company's financial performance. It reflects the company's net income after deducting all expenses, including taxes. Monitoring PAT over time helps assess the company's ability to generate profits and sustain its operations.

Speeds up investment decision-making:

Investors use Profit After Tax as a critical metric when making investment decisions. A consistently positive PAT indicates a profitable and financially healthy company, making it more attractive to potential investors. Conversely, a declining or negative PAT may raise concerns about the company's financial stability.

Defines business sustainability:

It is important to understand PAT to find the long term viability of a company. Positive PAT figures indicate consistent profitability, which suggests that the business is making enough money to pay its bills, make growth investments, and give stakeholders their money back.

Tax Planning and Compliance:

PAT offers information about a business's tax compliance and planning. In addition to ensuring financial reporting transparency, analysing the effective tax rate and the effect of tax-related factors on net profits aids stakeholders in understanding the company's tax strategy.

Creditworthiness and Lending Decisions:

Profit After Tax is a critical factor for lenders and financial institutions when assessing a company's creditworthiness. This is important, especially during loan applications. In this evaluation process, it indicates the company's ability to generate profits for repaying loans. 

 

How to calculate Profit After Tax?
 

This is how you can calculate profit after tax:

Step 1: Gather information

Collect all the data you would want to calculate profit after tax. This includes gross profit and operational expenses for a definite period which could be a financial year.

Step 2: Identify Income Tax Expenses:

Look for the Income Tax Expense in the financial statements. This is the amount of tax the company is required to pay on its pre-tax profits.

Step 3: Calculate Net Profit After Tax (NPAT):

Subtract the Income Tax Expense from the Net Profit Before Tax to obtain the Net Profit After Tax.

Net Profit After Tax (NPAT)=Net Profit Before Tax (PBT)−Income Tax Expense

Trends that can affect Profit After Tax

These are the trends that can affect PAT:

Tax Policy Changes:

Some tax policy changes, such as corporate tax rates or tax incentives, can impact a company's PAT. Reductions in tax rates may lead to higher after-tax profits, while increases could result in lower PAT.

Economic Conditions:

Economic trends, like inflation and overall market conditions, can influence a company's sales and expenses. Economic downturns may lead to reduced sales and profitability, affecting PAT.

Industry Competition:

Industry competition can put pressure on pricing and profit margins. This can lead companies to adjust their pricing strategies and manage costs effectively to maintain or improve their PAT.

Cost Management and Efficiency:

Effective cost management and operational efficiency initiatives can positively impact PAT. Companies that streamline operations, optimise processes, and control expenses will likely see improved profitability.

Currency Exchange Rates:

Fluctuations in currency exchange rates can impact their international earnings. Exchange rate changes can affect the translation of foreign profits into the home currency, influencing PAT.

FAQ

What is Profit Before Tax (PBT)?

Profit Before Tax (PBT) is a company's total profit before accounting for income tax expenses. It includes all revenue and subtracts operating expenses, interest, and other costs. 

What is Profit After Tax (PAT)?

Profit After Tax (PAT) or Net Profit is the final profit a company retains after deducting all expenses, including income tax, from its total revenue. It represents the actual earnings available to shareholders and reflects the company's net profitability.

What is the Net Profit After Tax (NPAT) formula?

The Net Profit After Tax (NPAT) is calculated by subtracting the Income Tax Expense from the Net Profit Before Tax (PBT). 

The formula is NPAT = PBT - Income Tax Expense.

What is the PAT Margin formula?

The profit after tax (PAT) margin is calculated by dividing the net profit after tax (NPAT) by the total revenue and then, multiplying it by 100 to express it as a percentage. 

The formula is PAT Margin = (NPAT / Total Revenue) * 100.