Profit After Tax (PAT) is one of the most important indicators of a company’s true profitability. The calculation starts with total revenue which gets reduced by all expenses and tax payments to produce final earnings.

PAT provides information about the total money a company generated during its financial year which can be used for dividend payments or business reinvestment.

Companies in India must report their PAT figures according to the financial standards set by the Companies Act 2013 and the relevant Indian accounting standards.

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Key Takeaways

PAT shows net earnings after all taxes are deducted.
The metric shows the company’s actual earnings capacity.
The metric allows investors to track company progress through multiple years while comparing it to its rivals.
The metric shows the portion of profits that can be paid as dividends or used for business expansion.

Difference Between Profit and Profit After Tax

BasisProfitProfit After Tax (PAT)

MeaningEarnings before tax deductionEarnings after deducting all taxesFocusOperational performanceFinal usable earningsUsageEvaluating business efficiencyAssessing financial strength

PAT shows the actual income that a company retains after it has paid all its tax responsibilities.

Why is PAT Important?

1. Measure of Financial Performance

PAT shows how well a company generates extra funds after it pays all its expenses and taxes. A consistently growing PAT indicates strong financial health.

2. Basis for Dividend Distribution

Dividends get paid from profits that remain after all taxes have been paid. Companies with higher PAT values usually have better abilities to pay dividends.

3. Comparison Tool

Investors use PAT to compare different financial years and assess companies that operate in the same industry.

4. Influences Investment Decisions

PAT growth shows that a company has stable operations while showing its potential for future growth because of its rising earnings.

5. Indicates Tax Efficiency

PAT shows how well a company controls its tax expenses while following all applicable legal requirements.

PAT Formula

Two formulas are available to compute PAT:

Formula 1:

PAT = Net Profit Before Tax − Total Tax Expense

Formula 2:

PAT (or NOPAT) = Operating Income × (1 − Tax Rate)

Operating Income calculation formula:

Operating Income = Gross Profit − Operating Expenses

Total Tax Expense includes corporate tax and other applicable taxes.

Step-by-Step Calculation of PAT

Step 1: Calculate Profit Before Tax (PBT)

PBT = Total Revenue − Total Expenses

Expenses may include:

Cost of goods sold (COGS)
Operating expenses
Interest
Depreciation
Administrative apparatus
Research and Development expenses

Procedure for Calculating Corporate Taxes

Firstly, decide the corporate tax rate prevailing in your country.

Step 2: Determine the Corporate Tax Rate

Corporate tax rates vary by country or region, so it is important to check the prevailing rate applicable to the company in your jurisdiction.

Step 3: Calculate Tax Figure

Tax = PBT × Tax Rate

Step 4: Calculate PAT

PAT = PBT − Tax

An Illustrative Example Explained

To illustrate, let us take the simple Profit & Loss account.

ABC Ltd. – Profit & Loss Account (Illustration)

ParticularsAmount (₹)

Revenue1,50,000Cost of Goods Sold(25,000)Gross Profit1,25,000Selling Expenses(15,000)Overhead Expenses(5,000)Administrative Expenses(15,000)Operating Profit (EBIT)90,000Interest(10,000)Earnings Before Tax (EBT)80,000Tax(10,000)Profit After Tax (PAT)70,000

Thus, the net income for the company, after the tax, is worth ₹70,000.

What is PAT Margin?

The PAT Margin reflects every rupee of revenue earned as profit for the company once tax is deducted.

PAT Margin = (PAT ÷ Revenue) × 100

Calculation:

(70,000 ÷ 1,50,000) × 100 = 46.67%

A higher PAT margin denotes:

Tighter systems for controlling costs
A measure of tax efficiency
Orderliness in management

By Profits After Tax:

Shows actual earnings that can be distributed to equity shareholders
Helps in analyzing dividend-paying power
Useful in comparing companies
Reflects overall financial stability

Disadvantages of PAT

Can fluctuate due to tax rates
May not only depend on the operational efficacy of a company
May be impacted by one-time gains or losses

Amounts from Profit After Tax help a business optimize fiscal soundness and shareholder wealth. Thus, these amounts provide a sound basis for measuring and identifying an organization’s capacity to distribute dividends.

Nevertheless, PAT should not be considered in isolation and must be accompanied by other metrics such as revenue growth, operating margin, debt levels, and return ratios.

Frequently Asked Questions (FAQs)

What does PAT signify?

PAT is the net income that remains after deducting all expenses and taxes from the total revenue.

What is the difference between PAT and net profit?

There is not much difference between PAT and net profit; both represent net earnings after tax.

What is considered a decent PAT margin?

A good PAT margin differs depending on industry. Generally, a higher margin indicates improved economic worth and production efficiency.

Is it possible for a company to have revenue but no PAT?

Yes. If overall expenses and taxes exceed revenue, PAT may be zero or negative.

Why do shareholders pay attention to PAT?

Because it represents the real profit available to be distributed as dividends or reinvested.

Yes. Strong and consistent PAT growth can positively affect investor sentiment and share price.

Is PAT computed before or after tax assessment?

PAT is calculated after tax and represents income available for dividend distribution or reinvestment.

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What is Profit After Tax & How to calculate it?