What is Profit After Tax?
- Author :
- TATA AIG Team
- ●
- Published on :
- 29/12/2023
- ●
- 2 min read
Taxes play an important role in businesses as they help avoid legal complications, promote economic stability, provide incentives for any investment and build trust in business.
Therefore, the Indian government has launched PAT to calculate the financial overview of a company that provides a clear picture of a business’s true earnings. The PAT full form stands as profit after tax.
Let us get into a detailed understanding of profit after tax.
Profit After Tax Meaning
Profit after tax, also called as PAT, is a crucial financial metric. PAT meaning in finance represents the amount of money a company has earned after a deduction in all applicable corporate income taxes. Thus, Profit after tax is referred to as the remaining net income of a company, showcasing the firm’s financial health.
Investors and shareholders closely keep their eyes on the profit after tax of an organisation to analyse the firm’s financial and operational performance. A consistent PAT is an encouraging sign for investors, indicating the company’s ability to generate valuable revenues.
Thus, profit after tax is considered as a powerful tool that goes beyond measuring the revenue and expenses of a business.
Difference Between Profit and Profit After Tax
Understanding that both profit and profit after tax terms are not similar is essential before any investment. The differences within profit and PAT lie in the impact of taxes on the final earning figure.
The profit shows the earnings before tax deductions.
On the other hand, profit after tax accounts for the impacts of taxes on the final fund outcomes.
As believed, PAT is a more comprehensive measure of any organisation’s true profitability, because it reflects the remaining amount of money after fulfilling the taxes.
Importance of Profit After Tax or PAT in Finance
Profit after tax is referred to as a financial calculator guiding a company through the twists and turns of the stock market world. It reflects the profitability and losses of a company.
Here are some key reasons why profit after tax acts as high priority asset for a company:
True net earning calculation- PAT represents the actual earnings and the genuine financial performance of an organisation, by subtraction all applicable taxes. It provides a realistic picture of the earnings available for the investors and stakeholders, ensuring that the evaluation of the business is profitable.
Tax planning- Profit after tax works as a key tool in the evaluation of a company’s tax pattern. A company with managed PAT regulations is likely to be more fitting in tax laws, minimising the risks associated with legal issues.
Dividend distribution- Organisations often use the profit after tax as a basis for dividend distribution. A higher PAT provides more fund capacity to reward investors through dividend payments.
Strategic investment decisions- An organisation generally uses PAT as a crucial matter in decision making. It guides us through the company's actual financial health and helps in long term planning by implementing effective business strategies that align with the company’s fund needs.
Comparison between businesses- PAT allows meaningful comparisons within industries. Stakeholders and investors often look at the PAT margins to understand the percentage of revenue as profit. Profit after tax calculation is a positive sign for anyone who is going to invest in a specific business, indicating better prospects for future business growth.
Investors, business analysts and stakeholders fully rely on PAT in the stock market to make informed decisions about a firm’s financial condition and look out for a long term success.
How to Calculate Profit After Tax?
Calculating Profit after tax involves several steps and requires a clear understanding of a company’s financial statements after an exclusion of all applicable taxes.
Before applying the calculation formula, you must understand these terms:
Profit after tax margin meaning- PAT margin meaning a financial metric that expresses the profitability of a business.
Profit before tax meaning- This is the amount of profit a company has earned before the reduction of all taxes.
Tax rate meaning- The tax rate may vary depending on the organisation’s location, and industry type but it ensures that the tax rate used matches with the relevant tax laws.
| The formula for the net profit is - Profit after tax = total profit before tax - total tax rate |
|---|
Steps to Calculate Profit After Tax
Take a look at the steps involved in calculating the PAT -
Start by identifying the company's net profit.
Once you get the net profit, find the profit before tax.
Use the right tax rates based on your business profile.
Now subtract the applicable taxes.
Example to Calculate Profit After Tax
The following PAT calculation illustration chart will help you understand the formula more effectively, have a look -
| Aspects | Amount |
|---|---|
| Every 12 months revenue | ₹50,000 |
| Performance expenses | ₹15,000 |
| Non-operating | ₹5000 |
| Tax rate | 0.3 |
| Profit before tax ₹50,000 - ₹(15000 + 5000) | ₹30,000 |
| Applied tax amount - 30% of ₹30,000 | ₹9000 |
| Profit after tax (₹30,000 - ₹ 9000) | ₹21,000 |
Note - This illustration is just for example purpose
Hence, the profit after tax amount is ₹21,000
This process provides a clear representation of a company’s earnings available for investors after deducting the taxes.
Pros and Cons of Using a PAT
Pros
Faultless profit measurements - Profit after tax gives a more accurate study of a company’s profitability by addressing all of the tax deductions.
Confident investment - A consistent and growing profit after tax can boost up trust among investors indicating potential returns.
Improved management ability - Prioritising profit after tax contributes to managing and implementing investment strategies in more efficient ways.
Cons
Dependent on tax changes - Profit after tax is easily affected by changes in tax laws or tax rates. Even minor fluctuations in tax regulations can leave an impact on the final PAT figure.
Industry-specific comparison- Different industries have different characteristics, so, comparing PAT across various industries will not provide accurate insights sometimes.
Easily affected - Profit after tax is easily affected by a chain of reasons. It is essential to consider other factors for a comprehensive analysis.
It is crucial to understand these pros and cons associated with PAT for investors to make informed decisions and judge a business’s financial performance accurately.
Closure
Profit after tax serves as a key financial indicator reflecting the bottom line of business health. In simple words, profit after tax is the money a company is left with after paying all their bills along with the applied taxes.
Tata AIG‘s Health Insurance Plans- Getting Additional Tax Saving
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FAQS
Is profit after tax also called net profit?
Yes, the profit after tax is indeed called a net profit because it showcases the final amount remaining after deducting taxes and all other expenses.
What is profit after tax in the stock market?
In the context of the stock market, PAT reflects the actual earnings available to shareholders after deducting all expenses, it helps them to analyse and evaluate the company’s profitability and financial growth.
Disclaimer / TnC
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