What is Profit After Tax: Definition, Formula & Importance Explained

Taxes are integral parts of every business unit. Therefore, the Indian Government has introduced Profit After Tax (PAT) to evaluate the amount of money that remains with you once you are done paying off all their taxes. It is simply the profit amount left with the shareholders of organisations, including private limited, public limited, government-owned, privately-owned companies after they have paid their taxes.

Do you wish to learn all about PAT and maintain it in your business? Then, this article will guide you with all the advantages, disadvantages and significance of this measure!

What Is Profit After Tax (PAT)?

The Indian business laws make it mandatory for every business unit to pay income taxes annually. Profit After Tax refers to the earnings of a business after the income taxes are deducted. It is often seen as the final amount of profit made by a company and its best ability to generate a return. PAT incorporates operating income and income from other sources, including interest income.

Investors usually supervise the PAT of an organisation closely to analyse its changes over time. It, therefore, acts as a valuation indicator, which also affects the stock price of a company. Thus, if you wonder, "what is Profit After Tax?" it is the final amount that an organisation retains after paying off all its taxes and liabilities and distributes among the shareholders as its retained earnings.

How Profit After Tax (PAT) is important for a Company?

Profit After Tax is an amount that an organisation and its shareholders can take home. In this regard, you can understand this concept further with its following features.

PAT is an essential financial measure looking after the rise or fall of a company’s retained earnings.
It measures the capabilities of an organisation in converting its revenue into profits.
People often use it for margin analysis, particularly while comparing companies within an industry.
Investors determine the competency of a company to make profitability by measuring its PAT.
Companies can use their PAT to understand if they need to control their costs.

What is the Formula to Calculate Profit After Tax (PAT)?

Now that you have a basic understanding of Profit After Tax, you must be wondering about its calculation process. The following section will give you an idea of the formula for Profit After Tax.

Profit After Tax = Profit Before Tax - Tax rate

Profit Before Tax (PBT): One can calculate it by considering total expenses, including Opex and non-operating. It is then excluded from the Total revenue (operating and non-operating revenue).

Tax rate: The taxation is calculated based on PBT, while the geographical location of a company determines its tax rate.

An example will help you understand the formula of Net Profit After Tax further-

IABC Pvt Ltd earns annual revenue of ₹ 50,000. Its operating and non-operating expenses are ₹ 15,000 and ₹ 5,000, respectively. The tax rate is at about 30%.

Particulars	Amount
Annual revenue	₹ 50,000
Operating expenses	₹ 15,000
Non-operating	₹ 5,000
Tax rate	30%
Profit Before Tax (₹ 50,000 - ₹ (15,000 + 5,000)	₹ 30,000
Taxable amount (30% of ₹ 30,000)	₹ 9,000
Profit After Tax (₹ 30,000 - ₹ 9,000)	₹ 21,000

Thus, PAT of ABC Pvt Ltd is ₹ 21,000.

What Is the Significance of Profit After Tax (PAT)?

The concept of Net Profit After Tax is a significant one for analysing an organisation’s growth and capabilities. It provides the employers with internal and external management with financial data depicting a company's performance in terms of its financial developments. As it already reduces one variable, the taxation amount, the company owners can reflect on the take-home profit of their company and try to improve it.

If a company is functioning in an industry that generates considerable tax benefits, it will help increase its net income. However, if the industry is facing unfavourable tax benefits, a company's net income will naturally decrease. After calculating the PAT, company owners can compare the operations of other firms regardless of the tax laws already in existence.

Moreover, Profit After Tax also helps investors analyse their investment decisions. If they calculate and examine the PAT of certain companies, it will give them a wholesome view of its financial competence. If this begins to decrease, the investor will have to decide whether or not to continue investing in it.

What Are the Advantages of Profit After Tax (PAT) Measures?

Now that you know the purpose and capabilities of Profit After Tax, you should check out the following advantages of this measure to implement it in your company.

PAT increases stockholder equity and stock value by adding the retained earnings to the corporate balance sheet.
The increased stock price momentum helps companies attract investors.
PAT increases liquidity in companies, thereby providing funds for emergencies and helping a company survive without taking loans.
As investors learn more about a company's retained earnings, they might take an interest in funding for its growth.

What Are the Disadvantages of Profit After Tax (PAT) Measures?

While Profit After Tax can be helpful for most businesses and their future growth, one should also consider its disadvantages in this regard.

Interest rates are more beneficial for companies while borrowing money than relying only on the growth rates of an existing profit.
Moreover, shareholders prefer to receive higher dividends than reinvesting the profit to increase the stock value.

As you can see, Profit After Tax is an essential requirement for analysing companies' financial profitability and competence. Its calculation process requires you to exclude all the taxable amounts once you pay them. Maintaining this amount helps you analyse the retained earnings of your organisation for the shareholders.

Frequently Asked Questions

✓ Why do profits decrease after-tax?

If the growth of net income is disproportionate to sales growth in your company, the after-tax profit margin can change.

✓ Is profit after tax in a company the same as net profit?

Net income after taxes (NIAT) helps describe your company's profit after paying all the taxes. Net income, on the other hand, deducts various aspects besides taxes, including its cost of goods sold, depreciation and amortisation, expenses, interest, etc. for an accounting period.