Profit After Tax (PAT): Meaning, Importance, and Calculation

The amount of money a business makes after covering all of its expenses, including taxes, is known as profit after tax, or PAT. It’s the last sum remaining, sometimes called the “bottom line.”

In general you use this formula to figure it out:

Total Revenue – Total Expenses – Taxes = Profit After Tax.

Put simply, it’s the actual profit made by the business. Understanding PAT helps investors and business owners determine whether a company is profitable and worth funding.

What is Profit After Tax (PAT)?

It’s critical first to comprehend what is PAT before realising its significance. The amount of money a business keeps after covering all of its costs, including taxes, is known as profit after tax, or PAT. It displays the profit that remains for the business after deducting liabilities, taxes, and operational and non-operational expenses. Since it represents the company’s actual earnings, this figure is significant.

Profit After Tax Meaning

Other names for PAT are Net Operating Profit After Tax (NOPAT) or Net Profit After Tax. PAT tells us how lucrative a company is and shows its financial performance. It is an essential tool for assisting shareholders and investors in evaluating the company’s performance and determining whether or not to invest in the business.

Profit After Tax Margin

Another crucial concept is the Profit after tax margin. It displays the portion of revenue that is left over as profit following the payment of all costs and taxes. A more significant PAT margin indicates greater profitability for the business.

PAT, to put it simply, shows how much money the company has left over to either reinvest in the business or distribute to its shareholders. It’s a useful metric for understanding a company’s profitability and success in its industry.

How to Calculate Profit After Tax (PAT)

In simple terms, Profit After Tax (PAT) is the amount of money a company earns after paying all its taxes. It shows how much is left after all expenses and taxes have been deducted. To calculate PAT, you need to know two critical figures: Net Profit Before Tax and Total Tax Expense.

Net Profit Before Tax:

This is the profit a company makes before deducting taxes. It includes revenue minus operating costs like salaries, rent, raw materials, and other business expenses.

Total Tax Expense:

This is the total tax a company pays during a particular period. It includes income tax, corporate tax, and other applicable taxes in India.

Profit After Tax Formula:

The formula to calculate profit after tax is straightforward:

PAT = Net Profit Before Tax – Total Tax Expense

Let’s look at an example:

Suppose a company has a Net Profit Before Tax of ₹50,00,000 and a Total Tax Expense of ₹15,00,000. The PAT is calculated as:

PAT = ₹50,00,000 – ₹15,00,000 = ₹35,00,000

This ₹35,00,000 is the company’s profit after tax, which can be used for shareholder dividends, business expansion, or savings.

Illustration of PAT Calculation

Let’s break down how to calculate Profit After Tax (PAT) in simple terms. PAT is the money a company keeps after covering all expenses, including taxes. Understanding this is easier with an example.

How to Calculate Profit After Tax?

To find PAT, you start with Profit Before Tax (PBT). PBT is calculated by subtracting the total expenses from the total income.

Here are the typical expenses a company might have:

1. Cost of Goods Sold (COGS): Money spent on making the products.
2. Depreciation: The decrease in the value of assets over time.
3. Overheads and General Expenses: Costs like office rent, utilities, and salaries.
4. Interest Paid on Loans: Payments for short-term and long-term loans.
5. Taxes Paid: Regular payments made to the government.
6. Research and Development Costs: Money spent on improving products.
7. Charge-Offs: Expenses written off as one-time losses.

Once all these are subtracted from the total income, you get PBT. From PBT, you deduct the tax amount to get Profit After Tax.

For example, if a company earns ₹1,00,00,000 in total income and its expenses are ₹60,00,000, the PBT is ₹40,00,000. If the tax rate is 25%, the tax is ₹10,00,000.

So, PAT = PBT – Tax = ₹40,00,000 – ₹10,00,000 = ₹30,00,000.

Profit After Tax Margin

This tells you how much profit the company makes for every rupee earned. A higher PAT margin means the company is more profitable.

In short, Profit After Tax is a key measure of a company’s success.

Importance of Profit After Tax (PAT)

Let’s look into why PAT matters so much and how it influences decisions across the board.

Why Profit After Tax is Important for Stakeholders

• For Investors

Investors want to know if putting their money into a business will be worth it, and PAT gives them a clear picture of a company’s profitability. It shows them how much profit the company is making after taking care of all its obligations. A higher PAT usually means better returns on their investment in the form of dividends or increased stock value.

Not just that, but PAT also helps investors evaluate whether the company is financially stable. A consistent or growing PAT indicates the company is likely managing its expenses well, growing its revenue, and staying profitable all signs that make it an attractive investment.

• For Lenders

Lenders, like banks or other financial institutions, also keep a close eye on PAT when deciding whether or not to approve loans. Why? Because a healthy PAT is a strong indicator that the company has enough money to repay its debts. If the PAT is low or inconsistent, lenders might see the business as a risky bet and either refuse to lend or charge higher interest rates to cover the risk.

In short, a strong PAT makes it easier for a company to secure loans and funding at favourable terms, which can help it grow even more.

• For Other Stakeholders

Other stakeholders, such as potential partners or even employees, also care about PAT. It signals the company’s overall financial health, which can affect everything from job security to business partnerships. If a company’s PAT is solid, it builds trust and confidence among all these groups.

What is PAT Margin?

Profit after Tax margin is a percentage that shows how much of a company’s revenue remains as profit after all the costs are taken care of. It’s a way to measure how well a business is managing its expenses and generating profits. A higher PAT margin means the company is keeping more of its revenue, which is always a good sign.

How Do You Calculate the PAT Margin?

The Profit After Tax (PAT) margin shows how much profit a company makes from its sales after paying all taxes. You can calculate it using this formula:

PAT Margin = Net Profit After Taxes ÷ Total Sales

It’s also called the net profit margin and helps measure how well a company turns its revenue into actual profit. This is an important way to check a company’s financial health.

Conclusion

Profit After Tax (PAT) shows a company’s profit after taxes, revealing its true earnings and financial health. It’s a key metric for investors, as higher PAT often boosts investor confidence, leading to increased stock prices.