After-Tax Operating Income (ATOI): Definition, Formula & Calculation
Revenues are generated by a company’s operations. They must, however, spend money in order to make sales. The difference between these two sums indicates a company’s profit or revenue.
Businesses assess these profits on a regular basis to determine how profitable their businesses are. In some circumstances, they can potentially experience a loss if costs are greater than income.
That’s where the after-tax operating income comes into play. But what exactly is ATOI?
Read on as we take you through a full definition of after-tax operating income. As well as show you the formula used to calculate it, and an example of how to properly run your calculations.
Table of Contents
- The amount of profit generated by a company’s normal operations is measured by operating income.
- Operating income is calculated by deducting all operating costs from a company’s operating income. This is equal to total revenue minus COGS and other operating expenses.
- It takes into account the impact of taxes and other one-time direct expenses that could skew operating income. This makes ATOI more beneficial to investors.
What Is After-Tax Operating Income (ATOI)?
After-tax operating income (ATOI) is the total operating income after taxes of a corporation. Any after-tax benefits or charges, such as those brought on by accounting adjustments, are not included in this non-GAAP measure.
Formula for Operating Income
The formula for after-tax operating income can be shown as:
How to Calculate the After-Tax Operating Income
An indicator of how much of a company’s revenue will ultimately turn into profit is operating income. A company’s capacity to create revenue from its operations over a given time period is measured by after-tax operating income (ATOI).
For example, let’s say that Company X has a gross revenue of $500,000. They also have operating expenses of $240,000 and depreciation of $50,000. Their taxes for this year amount to $100,000.
Using the ATOI formula we can calculate as follows:
ATOI = ($500,000 – $240,000 – $50,000) – $100,000
ATOI = $110,000
How Does After-Tax Operating Income Work
Earnings before interest and taxes can also be used to define the after-tax operating income (EBIAT). It calculates a company’s profitability. This is without taking the capital structure into consideration (debt to equity). ATOI is a rough estimate of profitability after taxes that excludes the tax benefits of debt.
It is crucial to comprehend how the company under study arrived at its ATOI value. This is because the measure’s non-GAAP nature means that what is included and excluded varies.
Why Does After-Tax Operating Income Matter?
Because it gauges a company’s profitability without taking into consideration its capital structure, the AOTI is significant (debt to equity). It is only the operating profit (or loss) made by a business after accounting for taxes. It is actually profits before interest and taxes (EBIT), with the effective tax rate taken into account.
After-Tax Operating Income – Example
Since it is a non-GAAP statistic and what is included and excluded varies by company and industry, after-tax operating income is subjective. As a result, there is no “high” or “low” amount or benchmark value for the ATOI. As a result, the ATOI should be contrasted with the data from prior years to arrive at a benchmark figure upon which to base the value.
Since the computation includes costs directly associated with ongoing business operations, the ATOI measures a company’s overall operating efficiency. Since there are many variables that can affect the amount, including the company’s leverage decisions, the ATOI does not include the interest expense like the net operating profit after tax (NOPAT) computation does. Additionally, it excludes dividend payments and one-time administrative expenses because these are not a routine element of how the organization operates.
After all of a business’s income taxes have been paid, the company’s operating income is referred to as after-tax operating income or ATOI. It’s crucial to keep in mind that ATOI is not a GAAP definition but an evaluation method used to evaluate operating profitability.
Operating income after tax and net operating profit after tax are very similar (NOPAT). The top line of the income statement is where you can find NOPAT.
Understanding your ATOI is crucial since it may help you determine how profitable your business’s operation is.
FAQS on After-Tax Operating Income
EBIT is essentially net income with tax costs subtracted to determine a company’s total profitability from all sources, including operations, investments, etc. After-tax operating income does not include any income from investments, like interest income, dividends, etc., whereas EBIT does.
A company’s operating income is determined by deducting operating expenses from its operating income.
Operating profit is the remaining operating revenue for a business after all operating costs have been deducted, excluding the cost of debt, taxes, and certain one-time charges. Net income is the taxable profit that remains after all expenses incurred during the period have been deducted from total revenue.
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