After Tax Operating Income (ATOI): What it Means, How it Works

What Is After Tax Operating Income (ATOI)?

After-tax operating income (ATOI) is a company's total operating income after taxes. This non-GAAP measure excludes any after-tax benefits or charges such as effects from accounting changes.

The Formula for ATOI Is:

Where operating income is (gross revenue - operating expenses - depreciation), also known as the pre-tax operating income (PTOI).

Understanding After Tax Operating Income

The operating income is a measure of how much of a company's revenue will eventually become profit. After-tax operating income (ATOI) measures a company's ability to generate income from its operations for a specified time period. It is simply the operating income (or loss) generated by a company after factoring in the effect of taxes. In effect, it is earnings before interest and taxes (EBIT), adjusted for taxes. Thus, it can also be calculated as:

Some analysts choose to use the effective tax rate of the firm, others opt for the marginal tax rate. Furthermore, some calculate after-tax operating income as:

The after-tax operating income can also be defined as earnings before interest and after taxes (EBIAT). It measures a company's profitability without taking into account the capital structure (debt to equity). ATOI is an approximation of after-tax cash flows without the tax advantage of debt. A company that does not have debt, will have its ATOI equal its net income after tax (NIAT).

Due to its non-GAAP nature, what is included and excluded in the measure differs across companies and industries, therefore, it is important to understand how the company under analysis arrived at its ATOI value.

ATOI and NOPAT

ATOI in the form of net operating profit after tax (NOPAT) is used to calculate free cash flow to firm (FCFF), which equals net operating profit after tax, minus changes in working capital. It is also used in the calculation of economic free cash flow to firm, which equals after-tax operating income minus capital. Both measures are primarily used by analysts looking for acquisition targets since the acquirer's financing will replace the current financing arrangement.

The ATOI is not as commonly used in financial analysis as the pre-tax operating income (PTOI) measure, however, it is monitored closely as it represents cash available to pay creditors if there is ever a liquidation event. While operating income before taxes normally appears directly on the income statement, after tax operating income does not. As the first formula presented shows, ATOI can be calculated from PTOI by calculating the tax liability specifically for the pre-tax income figure and subtracting that tax figure from the pre-tax income figure.