Net Operating Profit Before-Tax (NOPBT) & NOPBT Margin

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Net operating profit before-tax (NOPBT) is the unlevered, before-tax operating cash generated by a business. It represents the true, normal and recurring before-tax profitability of a business. GAAP earnings or, even worse, non-GAAP earnings, are highly unreliable and are subject to misleading management manipulation.

NOPBT is a very important value because it is the pre-tax version of net operating profit after-tax (NOPAT), which is the numerator in our return on invested capital (ROIC) calculation, Figure 1 provides the simplified formula for calculating NOPBT.

Figure 1: How to Calculate NOPBT – Simplified

Sources: New Constructs, LLC and company filings

Figure 2 shows how we calculate NOPBT margin. NOPBT margin measures the amount of NOPBT generated from a firm’s total operating revenue and provides insights into the operating efficiency of a business.

Figure 2: How to Calculate NOPBT Margin

NOPBT / Total Operating Revenue = NOPBT Margin

Sources: New Constructs, LLC and company filings

Figure 3 shows the companies with the highest/lowest NOPBT over the trailing twelve months as of May 3, 2021.

Figure 3: Companies with Most/Least NOPBT: TTM as of May 3, 2021

Sources:  New Constructs, LLC and company filings.

As shown in Figure 3, Apple Inc. (AAPL), Microsoft Corporation (MSFT), and Alphabet, Inc. (GOOGL) make up three of the top five most profitable (on a pre-tax basis) companies under coverage. We’ve covered the strength of a select few Technology companies, these three included, in greater detail in our report Don’t Buy Fool’s Gold. Vale S.A. (VALE) and JPMorgan Chase & Company (JPM) make up the remaining most profitable firms on a pre-tax basis.

On the other hand, three airlines, American Airlines (AAL), United Airlines (UAL), and Delta Airlines (DAL), along with airline manufacturer The Boeing Company (BA) are the least profitable (on a pre-tax basis) companies under coverage. The makeup of least profitable firms may not come as a surprise, given the challenges the entire airline industry has faced over the past 12-16 months. America Movil SAB (AMX) is the least profitable firm under coverage on a pre-tax basis.

When we calculate NOPBT, we make numerous adjustments to close accounting loopholes and ensure apples-to-apples comparability across thousands of companies.

Our Robo-Analyst[1] technology provides easy access to more reliable fundamental research. There’s no reason for investors not to take advantage of best-in-class calculations of a firm’s recurring profits, e.g. NOPBT. Figures 4 and 5 show the high level of diligence that goes into our NOPBT calculation for all companies. We use our Uber (UBER) model as an example.

Note all clients who subscribe to our valuation models get access to detailed analysis like that in Figures 4 and 5. Our models also offer access to all our data in excel and audit-ability of all data back to the original 10-Ks and 10-Qs upon which our models are built.

Figure 4: How to Calculate NOPBT – Detailed

Sources: New Constructs, LLC and company filings

After removing cash operating taxes from NOPBT, we can reconcile reported GAAP net income with NOPAT, per Figure 5.

Figure 5: Adjustments to Reconcile GAAP Net Income to NOPAT: UBER

Sources: New Constructs, LLC and company filings

Our models and calculations are 100% transparent because we want our clients to know how much work we do to ensure we give them the best earnings quality and valuation models in the business.

[1] HBS features our technology, the only technology that brings material footnotes data to investors, in the case study: “New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.”

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