What is PAT? Difference Between PAT and Net Profit Explained

In the world of finance and accounting, the language of numbers has its own story to tell, Irrespective of whether you run an organization, invest in the stock market, or study the world of finance. But one aspect that is the most fundamental, no matter what your area of interest is, has to do with the way and means of earning and retaining that money. Out of all the indicators to check the health of a company, “Profit” is the word that is most closely reviewed. But profit is not one word, profit is multi-layered, there is profit at different levels.

Two of the most commonly used terms in the income statement are Net Profit and Profit After Tax or PAT. Although both terms mean the same, they have different roles in the financial statement. Though both show how profitable the business has been, they illustrate two different, points in the profitability of the business. It is important to understand the difference between the two, as they illustrate two different points of the profitability of the business. In this guide, we will simplify both of these terms to help you understand the income statement better.

What Is PAT (Profit After Tax)?

The Profit After Tax (PAT) represents the amount of funds remaining after deducting operating costs, interest expense and most importantly, income tax from the net revenue of a business. This represents "the bottom line" of a business income statement.

Think of PAT as "take home salary." If you earn a gross salary, you first pay for transport, food, and rent. After that, the government will take income tax. What you have left in your account at the end of the month, which you can actually save and spend to treat yourself with, is your PAT. It shows the actual profit which belongs to the owners of the business.

For additional information, also check out: Difference Between Tax Planning and Tax Evasion

Why Does It Matters?

Pat is probably the single most important parameter for investment analysis. Based on PAT, the Earnings Per Share of the stock is calculated, which determines the performance of the stock price. The increasing trend of the PAT reveals that it is not only making sales but is also efficiently managing its tax and interest costs. It is the source from which dividends are drawn.

What Is Net Profit?

Net Profit is a generic term that defines the difference between total revenue and total expenses in a given accounting period. However, in most accounting systems, Net Profit is perceived as the profit realized before making the final appropriation for tax, although in some systems, it is used as a generic term and regarded as equal to the final profit realized by the company. Therefore, with the aim of clarity, financial analysts use "Net Profit Before Tax" (NPBT).

Components Involved

Net Profit is determined by subtracting the following from the Gross Profit (which is Revenue - Cost of Goods Sold):

Operating Costs: Salaries, Rent, and Electricity.
Non-Operating Items: Interest on loans or losses on sales of assets.
Depreciation and Amortization: A form of erosion that occurs on tangible and intangible assets.
Interest: The rate charged on capital borrowed.

Business Relevance

Net Profit is an indication of how well a company is running as far as its efficiency is concerned. It gives a particular company’s management an idea of how well they are containing their costs in relation to sales. A company that is registering a large Gross Profit but low Net Profit means that its "indirect" costs are too high.

To get more insights, check out: Income Tax Rules: Latest Updates Every Taxpayer Should Know

PAT and Net Profit: A Comparison

Feature	Net Profit (Often times referred as NPBT)	Profit After Tax (PAT)
Basic Meaning	Profits earned after incurring all operating and non-operating expenses, excluding tax.	The last amount left after deduction of tax from Net Profit.
Sequence	It is presented before the tax computation in the Income Statement.	It is the bottom line to the Income Statement.
Tax Impact	It is the basis upon which the tax rate is calculated.	It is created because of the tax deduction.
Shareholder Focus	Indicates how profitable the company was through its operations.	Reveal the available amount for dividends.
Formula	Total Revenue − Total Expenses (Excluding Tax).	Net Profit – Income Tax

Importance of PAT and Net Profit in Financial Analysis

These numbers are then utilised by financial analysis to conduct “Ratio Analysis”, which enables comparison among companies of varying sizes.

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Net Profit Margin: The Net Profit divided by the Total Revenue is known as the Net Profit Margin. The percentage represents the number of cents of profit made for every dollar sold.
Earning Per share (EPS): This is obtained by dividing the profit after tax (PAT) by the total number of shares. This is the most significant figure in stock market valuations.
Dividend Payments: The amount paid to shareholders depends on the PAT earned by the company. When the PAT is lower, the dividends paid to the shareholders will be lower too.
Debt Servicing: The lenders review the Net Profits to determine whether the business can generate sufficient funds to repay the interest on the borrowed amount.

For additional information, also check out: New Tax Regime Explained

Advantages and Limitations of PAT and Net Profit

Advantages

Clarity: These ratios help create an idea about whether it is really making profits or just "sales."
Comparability: A retail store in New York can be compared to that in London using the profit margins for comparison.
Valuation: These figures provide the basis for calculating P/E (Price-to-Earnings) ratios.

Limitations

Manipulation: In certain instances, "creative accounting" can be practiced to exaggerate Net Profit.
One Time: Sometimes, a company sells its building and records it as profit. This increases the PAT of the company by misleadingly showing stronger performance of the regular operations of the company when, in fact, it is not.
Tax Variations: PAT may get influenced by changes in taxation policies of the government, which in no way relates to the efficient working of the business.

Conclusion

Net Profit is the measure of a company’s efficiency and cost management prowess, the Profit After Tax (PAT) measure shows you the truth of what really matters, the ultimate profit left for taking. An entrepreneur uses the Net Profit measure for internal management, and for cost control, while the investor uses the PAT measure, and that measure determines the worth of investment.

FAQ’s

1. Is PAT and net profit the same?

Net Profit is generally known as the Profit Before Tax (NPBT) and PAT is what is left after the income tax has been deducted from that Net Profit.

2. What is the importance of PAT to investors?

A concern for investors is the PAT, which is the actual amount available for declaration as dividends as well as for further investment in order to enhance the market price of stocks, which is then measured by the Earnings Per Share (EPS).

3. What is the formula for net profit?

Net Profit is calculated by deducting from total revenue all operating costs (such as salaries and rent), interest on debt, and depreciation of assets.

4. Can PAT be greater than Net Profit?

Net Profit This is not correct because PAT cannot be greater than Net Profit since tax is a deduction. However, when a company gets a refund of tax from the previous year, there might be a situation where the financial statement reflects a greater profit, but generally, PAT is always less than or equal to Net Profit.

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