After-Tax Return On Assets

What Is After-Tax Return on Assets?

After-tax return on assets (ROA) is a financial ratio used to measure after-tax income earned by a company from its assets. After-tax ROA compares after-tax income to average total assets (ATA) and is expressed as a percentage. A company that earned $100 of after-tax income on $400 of ATA would have a 25% After-tax ROA. The after-tax ROA formula is: (after-tax income ÷ ATA) x 100.

Understanding After-Tax Return on Assets

After-tax income is the income left after revenues are reduced by expenses, deductions, and taxes. However, after-tax income is an umbrella term covering after-tax income computed to include or exclude different items of income, expense, deduction, or taxes.

After-Tax ROA is a performance measure. After-tax ROA computed with net income (NI) measures performance broadly. After-tax ROA computed with fine-tuned after-tax income measures aspects of performance delineated by specific income items.

Examples of fine-tuned after-tax income are net income, net operating profit after taxes (NOPAT), and net income after taxes (NIAT). Let’s deconstruct them to see how their income differs and how these differences impact the metric measured by After-tax ROA.

Types of After-Tax ROA

Net Income (NI)

Net income (NI) is a broad spectrum after-tax income useful to you, as company president, to evaluate the overall efficiency of your company’s total investment in assets at generating net income. The computation is: After-Tax ROA = (NI ÷ ATA) x 100.

Net Operating Profit After Taxes (NOPAT)

Net operating profit after taxes (NOPAT) is core operating income, net of taxes. NOPAT excludes income earned from debt-financed assets. NOPAT is useful to company managers as it assesses the operating efficiency of the assets at generating after-tax operating income. NOPAT is useful to company shareholders as it measures the after-tax profit generated by equity-finance assets.

NOPAT can be computed using earnings before interest and taxes (EBIT) adjusted to remove the tax shield benefit (i.e., add back tax expense reduced by interest payments made on company debt). The computation is: After-Tax ROA = (NOPAT ÷ ATA) x 100 = [EBIT x (1-Tax Rate)] ÷ ATA x 100.

Net Income After Taxes (NIAT)

Net income after taxes (NIAT) is the sum of all revenues minus all expenses, including the cost of goods sold, depreciation, interest, and taxes. NIAT is found on the income statement’s last line. NIAT is useful to you, as a company competitor, because it is the company’s bottom line. 

The computation is: After-tax ROA = (NIAT÷ ATA) x 100. As a competitor comparing companies or industries, you may find NIAT a more useful measure as a percentage of total sales. The computation is: After-Tax ROA = Net Profit Margin x Asset Turnover = (Net profit ÷ Revenue) x (Sales ÷ Assets) = (NIAT ÷ Revenue) x (Sales ÷ Assets). 

As a company manager seeking to optimize operating performance, the NIAT can be used to check the operating cycle’s impact on after-tax economic profitability. The computation is: After-Tax ROA = Return on Sales x Asset turnover = (NIAT ÷ Sales) x (Sales ÷ Assets) = [(EBIT x (1-T))] ÷ Sales x (Sales ÷ Assets).

After-Tax ROA vs. Benchmarks

Remember, after-tax ROA has meaning only in context. That is, it must be compared to the performance of a benchmark such as historical company, competitor, or industry after-tax ROA or trends. An after-tax ROA higher and trending upward faster than a benchmark suggest that the assets are generating after-tax income more efficiently than the benchmark.