What Is After Tax Operating Income (ATOI)?
After-tax operating income (ATOI) represents a crucial metric for assessing a company’s financial performance. Essentially, it is the total operating income a company earns after accounting for taxes. This metric, considered non-GAAP, excludes any after-tax benefits or charges, including effects from accounting changes.
### Key Takeaways
– Operating income signifies the profit generated from a business’s operations.
– It starts with gross income (total revenue minus COGS) and then deducts all operating expenses.
– ATOI is more insightful for investors as it incorporates the impact of taxes and other one-off items that may distort operating income.
The Formula for ATOI Is:
The formula for ATOI involves operating income, calculated as (gross revenue – operating expenses – depreciation), also known as pre-tax operating income (PTOI).
Understanding After Tax Operating Income
Operating income reflects the portion of a company’s revenue that ultimately translates into profit. ATOI specifically assesses a company’s ability to generate income from its operations over a defined period. It is essentially the operating income (or loss) adjusted for taxes. In essence, it embodies earnings before interest and taxes (EBIT), accounting for tax effects. It can also be computed as:
Based on analyst preference, after-tax operating income can be determined using the effective tax rate or the marginal tax rate. Additionally, some analysts define it as earnings before interest and after taxes (EBIAT). This metric gauges a company’s profitability independently of its capital structure, offering an approximation of after-tax cash flows without the tax benefits of debt. For a debt-free company, ATOI aligns with net income after tax (NIAT).
Given its non-GAAP nature, the components encompassed or excluded in ATOI calculation vary among companies and industries. Hence, understanding the methodology behind a company’s ATOI value is crucial for accurate analysis.
ATOI and NOPAT
ATOI, represented as net operating profit after tax (NOPAT), is utilized in calculating free cash flow to the firm (FCFF). This calculation involves subtracting changes in working capital from net operating profit after tax. Additionally, ATOI contributes to the computation of economic free cash flow to the firm, obtained by deducting capital from after-tax operating income. These metrics are predominantly favored by analysts scouting for potential acquisition targets since the acquirer’s financing will replace the existing financial structure.
While not as widely employed in financial analysis as pre-tax operating income (PTOI), ATOI holds significance as it reflects the cash available for creditor payment in case of a liquidation. While pre-tax operating income typically appears in the income statement, after-tax operating income does not. As demonstrated in the initial formula, ATOI can be derived from PTOI by calculating the tax liability specifically for the pre-tax income and subtracting it from the total.