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After Tax Operating Income (ATOI)

A company’s operating income after all taxes are paid

What is After Tax Operating Income (ATOI)?

After tax operating income (ATOI) is a company’s operating income after all taxes are paid. The ATOI is not recognized by the GAAP as it excludes the after-tax benefits from accounting changes. Since it is not a part of GAAP, what is included and excluded in ATOI changes? After tax operating income is very similar in nature to the net operating profit after tax (NOPAT).

 

After Tax Operating Income (ATOI)

 

What is Operating Income?

The profit and loss statement of a company shows its operating and non-operating income and expenses over a period of time. The operating income of a company is defined by the core business that the company earns revenue from. For example, in a manufacturing business, the income will be generated by the core products they manufacture. The operating income will be the income they earn after subtracting the direct and indirect expenses. The formula for operating income is:

 

Operating Income = Gross Income – Operating Expenses – Depreciation

 

Where:

  • Gross income: It is the gross margin of the business, i.e., the income generated by the business after accounting for the Cost of Goods Sold (COGS). It is the income that appears in the first half of the profit and loss account before all the expenses are subtracted.
  • Operating expenses: They are the costs that are beyond the cost of goods sold and manufacturing costs and include selling expenses, interest expenses, general and administrative expenses, or miscellaneous expenses.
  • Depreciation: The depreciation expense is the total amount of depreciation incurred on an asset for a given period of time. If the depreciation expense is $1,000, it would be $1,000 in the monthly income statement and $3,000 in the quarterly income statement. The depreciation amount on the balance sheet is the expense incurred over a month or a year, but the depreciation on the balance sheet is the accumulated depreciation.

 

Operating income is an important financial metric that can be used to compare the company’s performance to previous years or to other companies in the same industry. Investors and creditors in the business use operating income to evaluate the efficiency and profitability of the business.

A good operating income assures investors that the business is growing and is capable of settling its debts. EBIT and EBITDA are important metrics that use the operating income to measure the performance of a company.

 

Income Tax for a Business

Income tax is the total amount of taxes that is paid by the company on its taxable profit for an accounting period. Some companies use an accelerated depreciation method such as the reducing balance method to the amount of profit and thereby, taxes owed.

The amount of tax paid each month is based on a historical percentage, and the rate is often adjusted by a tax expert on a monthly basis. The tax expense is reported on the income statement while the tax payable is a liability on the balance sheet.

 

Illustrative Example of ATOI

The income statement for Company A is as follows:

ItemAmount
Revenue (1)$2,000,000
Cost of Goods Sold (COGS) (2)$700,000
General Administrative expenses (3)$400,000
Depreciation (4)$150,000
Taxes (5)$25,000

 

The after tax operating income is subjective because since it is a non-GAAP measure and what is included and excluded in it differs by each company and industry. Hence, there is no benchmark figure for the ATOI, and no “high” or “low” amount. Therefore, the ATOI should be compared with the previous years’ figures to come to a standard amount that they can base the value on.

The ATOI measures the total operating efficiency of a company since the calculation takes into account the expenses that are directly related to the operations of the business. Unlike the net operating profit after tax (NOPAT) calculation, the ATOI does not take into account the interest expense as there are several factors that can influence the amount such as the company’s leverage decisions. It also does not include dividend payments and non-recurring items as they are not a part of the normal operations in the business.

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Cost of Goods Sold (COGS)
  • Depreciation Methods
  • Fixed and Variable Costs
  • Sales Revenue

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