PAT stands for Profit After Tax.
One of the main objectives of a company is to increase shareholders wealth. It will increase only when the company earns money from its business. More money means more wealth.
Due to this reason a company prepares periodical income statement to present before the shareholders. Income statement shows how efficiently the management has earned money for its shareholders.
We have the following five different types of profit used to find out the efficiency of the management in managing a company’s business. Here are they;
- Gross profit
- Operating profit
- Profit before tax
- EBITDA: Earnings before interest, tax, depreciation and amortisation
- Profit after tax
PAT is also referred to as net profit after tax.
In this article we will be discussing what is profit after tax and how PAT is calculated.
While discussing you will also know what is profit before tax (PBT).
What is profit after tax (PAT)?
One of the most analysed figures for financial analysts and investors is net profit after tax. Most of the time it’s referred to as PAT.
Profit after tax or PAT refers to the amount that the company has earned after paying its operating and non-operating expenses. Profit after tax (PAT) is generally used by the company to pay dividend or kept in the company to reinvest.
It shows how profitable the company’s business is after taking out all expenses out of the company’s total revenue to do business.
Net profit margin is the best financial metric to show you the efficiency of the management to retain money. Net profit margin is calculated by dividing profit after tax of the company by its total revenue.
Net profit margin tells you how much profit the company has made out of every rupee of total revenue or sales.
Profit after tax (PAT) helps to determine the health of the company. Year-on-year growth in PAT indicates better business prospects.
If Profit after tax (PAT) is positive, then it means the company has earned money for the shareholders after paying all expenses and taxes.
If the Profit after tax (PAT) is negative, it will be shown within brackets or with a negative sign. It means the business is in loss. Therefore it’s not taxable.
PBT stands for Profit Before Tax.
Example showing how profit after tax is shown in a income statement
Standalone Statement of Profit and Loss for the year ended 31st March, 2022
(All amounts in Rs Crores, unless otherwise stated)
| Particulars | Year ended 31st March, 2022 |
|---|---|
| INCOME | |
| Revenue from operations | 51,193 |
| Other income | 393 |
| TOTAL INCOME | 51,586 |
| EXPENSES | |
| Cost of materials consumed | 15,869 |
| Purchases of Stock-in-Trade | 9,274 |
| Changes in inventories of finished goods, Stock-in-Trade and work-in-Progress | (19) |
| Employee benefits expense | 2,399 |
| Finance costs | 98 |
| Depreciation and amortisation expenses | 1,025 |
| Other expenses | 11,167 |
| TOTAL EXPENSES | 39,813 |
| Profit before exceptional items and tax | 11,773 |
| Exceptional items (net) | (34) |
| Profit before tax | 11,739 |
| Tax expenses | |
| Current tax | (2,778) |
| Deferred tax charge | (143) |
| PROFIT FOR THE YEAR | 8,818 |
Profit for the year is nothing but the company’s profit after tax.
In an income statement you will find “Profit After Tax” with different names, such as;
- Profit for the year
- Profit for the period
- Net profit after tax
- After tax profit
- Net earnings
Here is the formula used to calculate Profit after tax (PAT);
Profit after tax (PAT) = Total revenue – total expenses = Total Revenue – Cost of goods sold – operating expenses – other expenses – interest – depreciation – taxes
Here is the formula to calculate net profit margin or Profit after tax (PAT) margin;
Net profit margin or PAT margin = Net profit or PAT / Total revenue
In general, many analysts and financial websites refer to Profit after tax (PAT) as the company’s Bottom line because it is the last or bottom line item on an income statement. Revenue of the company is referred to as Top Line.
Remember, profit shown after deduction of current tax and deferred tax in an income statement will always be referred to as profit after tax or PAT.
Profit before deduction of current tax and deferred tax charge is shown as profit before tax. It’s also referred to as PBT.
A higher profit after tax (PAT) ratio indicates that the company is working on a higher efficiency. In contrast, a low Profit after tax (PAT) ratio indicates that the business has a lower efficiency. You should always take into account other financial metrics while making investment decisions.
You should always compare net profit margin or PAT with its immediate competitors in the same sector before taking any investment decision.
