Understanding Profit After Tax (PAT): What It Means for Investors and Businesses

What is Profit After Tax (PAT)?

Calculating profit after tax (PAT) is important for understanding a business's true profits and employs a fairly user-friendly accounting calculation. The most common computation is as follows: PAT = Net profit before tax (PBT) – total tax expense. PBT is the amount a company earns after deducting operating costs, interest, and other expenses (but before the income tax is applied). The total tax expense encompasses all taxes applicable, including income and corporate tax.

To illustrate, if PBT is - ₹50,00,000 and the total tax expense is ₹15,00,000, then: PAT = ₹50,00,000 – ₹15,00,000 = ₹35,00,000. That last amount, ₹35,00,000, is the company's net earnings — the bottom line — and is available to be either reinvested for future growth, distributed as dividends to shareholders, or included in the company's financial reserves.

Understanding PAT through an Example

To gain a clearer understanding of how Profit After Tax (PAT) is calculated for a company, let's consider a fictional example of a business.

Say the company generates total revenues of ₹1,00,00,000 and its total expenditures are ₹60,00,000. The expenditures could be COGS, depreciation expense, expenses such as rent, salaries, and utility bills, loan interest, research and development, and charge-offs.

You can then subtract the total expenditures from the total revenues, giving the Profit Before Tax (PBT):

₹1,00,00,000 - ₹60,00,000 = ₹40,00,000

Assuming the company has a tax liability of ₹10,00,000 (25%) the PAT can be calculated as follows:

₹40,00,000 - ₹10,00,000 = ₹30,00,000

This amount of ₹30,00,000 is the actual profit of the company after completing all its costs and tax liabilities. This is the profit the company can reinvest, pay dividends out of, or save.

What is PAT Margin?

Another important financial metric, in addition to PAT, is the Profit After Tax Margin — also referred to as Net Profit Margin.

This metric shows the percentage of revenue realised as profit after all expenses and taxes have been paid. It is an effective measure of how well the company controls its operating expenses and costs.

FAQs

What is Profit After Tax (PAT)?

Profit After Tax (PAT) is the profit that an organisation keeps after it has deducted taxes, which include income tax, corporate taxes, or any other taxes from its total income.

Why is PAT Important?

PAT is an important metric of the organisation's ability to earn sustainable profits after meeting all obligations. Investors and creditors look to PAT as a straightforward measure of whether or not a business can be financially viable and profitable; thus, PAT is very important for financial decisions.

PAT is an important measure to evaluate the company's true profitability because it includes taxes. This is useful for stakeholders assessing the business's financial viability and overall performance.

How is PAT Calculated?

PAT can be derived from net profit before tax minus total tax expense. Thus, mathematically speaking, the formula to express profit after tax is: PAT = Net Profit Before Tax - Total Tax Expense.

What does a positive PAT indicate?

A positive PAT suggests a company can generate income after all its expenses; this means the company is financially stable or is able to generate a return to its shareholders.

Can PAT be Negative?

PAT could be negative depending on the amount of business gross losses that exceed tax losses. There could be several reasons, such as high costs or decreasing income.