Profit after tax (PAT), also known as net income, is the amount of money a business has left over after all expenses, including taxes, have been paid. It represents the company’s net earnings during a given period and is a comprehensive measure of its profitability.
The formula to calculate profit after tax is:
Profit After Tax = Gross Profit – Total Operating Expenses – Interest – Taxes
Gross Profit is the revenue generated from sales minus the cost of goods sold (COGS). Total Operating Expenses include items such as salaries, rent, utilities, depreciation, and amortization. Interest refers to interest expenses on any loans or debts the company has. Taxes refer to the amount the company has to pay in income tax.
Profit After Tax is a crucial measure for stakeholders, as it gives an overview of the company’s profitability and the earnings available to shareholders. It’s also used in calculating the company’s earnings per share (EPS).
It’s important to note that Profit After Tax is an accounting measure, and it may not always represent the actual cash that the company has generated during a period, as it includes non-cash expenses like depreciation and amortization. For a measure of the actual cash generated, one would look at the cash flow statement.
Example of Profit After-Tax
Suppose that XYZ Corp, a fictional company, has the following financial figures for a fiscal year:
- Revenue from sales: $500,000
- Cost of Goods Sold (COGS): $200,000
- Operating Expenses (rent, salaries, utilities, etc.): $100,000
- Interest Expenses: $20,000
- Taxes: $30,000
First, calculate the Gross Profit:
Gross Profit = Revenue – COGS
Gross Profit = $500,000 – $200,000
Gross Profit = $300,000
Then subtract the operating expenses, interest, and taxes from the gross profit to calculate Profit After Tax:
Profit After Tax = Gross Profit – Operating Expenses – Interest – Taxes
Profit After Tax = $300,000 – $100,000 – $20,000 – $30,000
Profit After Tax = $150,000
So, XYZ Corp’s Profit After Tax for the fiscal year is $150,000. This is the net income that XYZ Corp made after all expenses and taxes were deducted. It represents the earnings that are potentially available to be distributed to the shareholders or reinvested back into the company.