After Tax Operating Income (ATOI)
After-tax operating income (ATOI) is a company's total operating income after taxes.  Image by Sabrina Jiang © Investopedia 2021 Where operating income is (gross revenue - operating expenses - depreciation), also known as the pre-tax operating income (PTOI). The operating income is a measure of how much of a company's revenue will eventually become profit. As the first formula presented shows, ATOI can be calculated from PTOI by calculating the tax liability specifically for the pre-tax income figure and subtracting that tax figure from the pre-tax income figure. Due to its non-GAAP nature, what is included and excluded in the measure differs across companies and industries, therefore, it is important to understand how the company under analysis arrived at its ATOI value. ATOI in the form of net operating profit after tax (NOPAT) is used to calculate free cash flow to firm (FCFF), which equals net operating profit after tax, minus changes in working capital. While operating income before taxes normally appears directly on the income statement, after tax operating income does not.
What Is After Tax Operating Income (ATOI)?
After-tax operating income (ATOI) is a company's total operating income after taxes. This non-GAAP measure excludes any after-tax benefits or charges such as effects from accounting changes.
The Formula for ATOI Is:
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Where operating income is (gross revenue - operating expenses - depreciation), also known as the pre-tax operating income (PTOI).
Understanding After Tax Operating Income
The operating income is a measure of how much of a company's revenue will eventually become profit. After-tax operating income (ATOI) measures a company's ability to generate income from its operations for a specified time period. It is simply the operating income (or loss) generated by a company after factoring in the effect of taxes. In effect, it is earnings before interest and taxes (EBIT), adjusted for taxes. Thus, it can also be calculated as:
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Some analysts choose to use the effective tax rate of the firm, others opt for the marginal tax rate. Furthermore, some calculate after-tax operating income as:
Image by Sabrina Jiang © Investopedia 2021
The after-tax operating income can also be defined as earnings before interest and after taxes (EBIAT). It measures a company's profitability without taking into account the capital structure (debt to equity). ATOI is an approximation of after-tax cash flows without the tax advantage of debt. A company that does not have debt, will have its ATOI equal its net income after tax (NIAT).
Due to its non-GAAP nature, what is included and excluded in the measure differs across companies and industries, therefore, it is important to understand how the company under analysis arrived at its ATOI value.
ATOI and NOPAT
ATOI in the form of net operating profit after tax (NOPAT) is used to calculate free cash flow to firm (FCFF), which equals net operating profit after tax, minus changes in working capital. It is also used in the calculation of economic free cash flow to firm, which equals after-tax operating income minus capital. Both measures are primarily used by analysts looking for acquisition targets since the acquirer's financing will replace the current financing arrangement.
The ATOI is not as commonly used in financial analysis as the pre-tax operating income (PTOI) measure, however, it is monitored closely as it represents cash available to pay creditors if there is ever a liquidation event. While operating income before taxes normally appears directly on the income statement, after tax operating income does not. As the first formula presented shows, ATOI can be calculated from PTOI by calculating the tax liability specifically for the pre-tax income figure and subtracting that tax figure from the pre-tax income figure.
Related terms:
Capital Structure
Capital structure is the particular combination of debt and equity used by a company to funds its ongoing operations and continue to grow. read more
Earnings Before Interest After Taxes (EBIAT)
Earnings before interest after taxes (EBIAT) is one of a number of financial measures used to evaluate a company's performance. read more
Earnings Before Interest and Taxes (EBIT) & Formula
Earnings before interest and taxes is an indicator of a company's profitability and is calculated as revenue minus expenses, excluding taxes and interest. read more
EBITDA Margin
The EBITDA (earnings before interest, taxes, depreciation, and amortization) margin measures a company's profit as a percentage of revenue. read more
Federal Income Tax
In the U.S., the federal income tax is the tax levied by the IRS on the annual earnings of individuals, corporations, trusts, and other legal entities. read more
Free Cash Flow to the Firm (FCFF)
Free cash flow to the firm (FCFF) represents the amount of cash flow from operations available for distribution after certain expenses are paid. read more
Net Income After Taxes (NIAT)
Net income after taxes is an accounting term most often found in an annual report, and used to show the company's definitive bottom line. read more
Non-GAAP Earnings
Non-GAAP earnings are pro forma earnings figures, adjusted to eliminate one-time transactions to provide a "truer" picture of a company's performance. read more
Non-Operating Expense
A non-operating expense is an expense incurred by a business that is unrelated to its core operations. read more
Net Operating Profit After Tax (NOPAT)
Net operating profit after tax (NOPAT) is a company's potential cash earnings if its capitalization were unleveraged. read more