How to Value a Stock Step 1: NOPAT
This is the first article in a four part series that will walk readers through how to rate and value a stock. For this series, we will walk you through the process of valuing chemical manufacturer DuPont (DD). Our first step to gauge the value of a company is to determine the true, after-tax cash flows generated by its operations. We call this Net Operating Profit After Tax (NOPAT). Unlike GAAP net income, which can include financing costs and non-recurring items, NOPAT measures only those cash flows generated by the continuing operations of the business. Figure 1 shows how reported earnings have been a poor indicator of the actual operating profitability for DD since 2000. Furthermore, it shows that in the most fiscal year, 2013, reported earnings overstated DD’s profitability.
To learn more about the adjustments we make to calculate NOPAT, visit our Accounting Loopholes section.