Definition
Profit After Tax (PAT) is a financial metric that calculates a company’s net income after subtracting all taxes it owes from its gross profit. It is calculated by deducting all operating expenses, interest charges, loans, and taxes from a company’s total revenue. PAT is a critical measure that shareholders use to assess a company’s profitability.
Key Takeaways
- Profit After Tax (PAT) is a company’s net earnings after all income tax expenses have been subtracted. It represents the actual profit that a company accrues following all deductions.
- PAT is a key indicator of a company’s financial health and profitability. It provides a transparent picture of a company’s actual profitability and is often used by investors to assess financial performance.
- PAT is also essential for companies while making strategic decisions as it directly reflects their earnings. It can be reinvested back into the company for growth or used to reward shareholders in the form of dividends.
Importance
Profit After Tax (PAT) is a crucial financial term as it represents the net income of a company after deducting all expenses, including taxes.
This figure is significant because it gives a clear view of a company’s real profitability and available net earnings.
Stakeholders can use PAT to gauge the financial health of a company, analyze investment potential, or compare performance against competitors.
Depending on its size, PAT can indicate a firm’s growth potential, ability to repay debt, and its capacity to reinvest earnings for future advancements.
Therefore, evaluating PAT is vital for making effective strategic decisions and plans.
Explanation
Profit After Tax (PAT) serves a significant role in several essential contexts in the world of finance. It is essentially used to provide an accurate account of a company’s profitability, which is crucial for both internal and external stakeholders. For internal stakeholders, such as business owners and employees, PAT provides insights into the economic health and operational efficiency of the company.
It helps evaluate whether growth strategies are effective by comparing profit figures over certain periods. Furthermore, it assists in determining potential dividends to shareholders, as this profitability figure is the remaining profit after all costs, including taxes have been settled. For external entities like creditors, investors, and market analysts, PAT is a critical reflection of the company’s financial standing.
When contemplating investments, a company’s PAT can largely influence investor decision-making, as it is a direct indicator of the company’s capacity to generate profits and potential returns on investments. Moreover, for creditors or lenders, a healthy PAT might suggest that the company has the ability to repay its obligation. Finally, for competition and market comparison, PAT can be an excellent metric for comparing the financial performance among competitors within the same industry.
Examples of Profit After Tax (PAT)
Apple Inc.: In its 2020 fiscal year, Apple reported a Profit After Tax (PAT) of nearly $41 billion. This figure represents the company’s net income once all expenses, including taxes, are deducted from its revenue.
Amazon: In the fiscal year ending 2020, Amazon.com Inc. reported a Profit After Tax of $3 billion. This is the amount of net income that the company made after all operating expenses, interest charges, and tax expenses have been deducted from its total revenue.
Walmart: For the fiscal year ending in 2021, Walmart Inc. revealed a Profit After Tax of about $5 billion. The PAT was computed after accounting for all operating expenses, financial costs, and tax expenses during the year. Hence, it represents Walmart’s actual profits in that fiscal year which can be reinvested back into the company or distributed amongst the shareholders.
Frequently Asked Questions about Profit After Tax (PAT)
What is Profit After Tax (PAT)?
Profit After Tax (PAT) is the net profit earned by the company after deducting all expenses like interest, depreciation, tax, etc. It considers the final profit that the company retains after all deductions.
How is Profit After Tax (PAT) calculated?
Profit After Tax is calculated by deducting all operating expenses, interest, taxes, and preferred stock dividends (but not common stock dividends) from the total revenue of a company.
Why is Profit After Tax (PAT) important?
Profit After Tax stands as a critical indicator of a company’s net income left for shareholders after all obligations have been met. It forms a key component of the financial statements and contributes to the EPS (Earnings Per Share).
Does Profit After Tax (PAT) include dividends?
No, Profit After Tax does not include dividends. Dividends are a part of the profits that a company decides to distribute to its shareholders after all expenses and taxes are paid, including the PAT.
What happens if a company has a negative Profit After Tax?
If a company has a negative Profit After Tax (PAT), it means the company has made a loss in that particular period, implying that the total expenses and overheads of the company were more than its revenues.
Related Entrepreneurship Terms
- Gross Profit: The total revenue of a business minus the direct costs incurred in producing goods and services.
- Operating Profit: The profit earned after subtracting operating expenses from gross profit. Operating expenses include salaries, research and development costs, and depreciation.
- Net Profit: Represents the profit of a company after deducting all costs, taxes, interest, and dividends, and is considered the company’s final profit.
- Income Tax Expense: The amount of money a business pays in taxes based on their income for the year.
- Retained Earnings: The percentage of net earnings not paid out as dividends, but retained by the company to be reinvested into its core business, or pay debt.
Sources for More Information
- Investopedia: An extensive website giving detailed explanations of many finance concepts, including Profit After Tax (PAT).
- Corporate Finance Institute: A comprehensive resource that provides courses, templates, and articles on many areas of finance, including Profit After Tax.
- Financial Express: A news website that covers a wide range of finance and business topics, including articles about Profit After Tax.
- Accounting Tools: A website providing a deep dive into accounting concepts, including Profit After Tax.
