Taxes are crucial for every business. It is why, the government of India introduced the concept of Profit After Tax (PAT) to assess the sum left with a business after paying taxes. The amount left remains with the company's shareholders, including public and private limited, private and government-owned organizations, after settling the taxation.
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Every business unit must pay taxes in India annually. Profit after tax meaning can be defined as the net sum left with a firm or organization after the settlement of tax. The final profit amount generated by the company shows the ability of an organization to generate a significant return on the investment of shareholders.
In addition, the profit after tax sum highlights the goodwill and reputation of an organization. PAT comprises of operating income and income of an organization from other sources along with the interest income.
The investor of an organization evaluates the PAT to closely analyze the changes made in the performance of the firm. Hence, the PAT also performs as a valuation indicator. It is also responsible to affect the stock or share price of a company.
The profit after tax is the retained income of an organization upon paying off its taxes and liabilities, if any, which disseminates among the shareholders.
Importance of PAT can be understood by analyzing its following features:
PAT allows the shareholder to measure the rise or fall of an organization after evaluation of retained earnings which the shareholders can take home.
The shareholders generally evaluate the PAT of an organization to comprehend the efficiency of a company to convert revenues into profits.
The shareholders can compare PAT of different organizations. For example, it allows them to interpret the rise or fall of a company by taking into consideration the previous year's PAT.
Accordingly, the investor may decide whether to stay or withdraw from the organization. They can also compare different companies or industries upon evaluating the PAT of various organizations.
The investor, upon measuring the PAT, may analyze the competency of an organization to generate profit for the shareholders.
The PAT is also beneficial for firms. It allows them to comprehend costs involved to generate a considerable profit.
The calculation of PAT in finance is straightforward. First, one needs to evaluate the PBT (Profit Before Tax) of an organization along with the tax rate applied to the profit.
Formula to calculate the PAT is:
Profit After Tax = Profit Before Tax - Tax Rate
It is essential to understand the following sections to calculate the PAT:
PBT can be computed by evaluating the total expenses incurred by an organization, including non-operating and operating costs. Exclude the total expenses from the total revenue of an organization, including operating and non-operating revenue.
The taxation is calculated based on PBT generated by the organization. The tax rate for businesses generally stands at 30%. However, a surcharge may also apply if the revenue or PBT of an organization exceeds a specified limit.
Illustration of PAT Calculation
Let us understand the calculation of PAT with the following examples:
ABC private limited generated revenue of INR 5 crore. It incurred operating and non-operating expenses of INR 2 crore and 1 crore, respectively.
The tax rate for ABC private limited stands at 30%. Calculate the profit after tax (PAT) of the company.
From the aforementioned data, one may get:
Revenue of ABC private limited = INR 5 crore
Operating expenses of ABC private limited = INR 2 crore
Non-operating expenses of ABC private limited = INR 1 crore
Thus, upon deducting the operating and non-operating expenses from the revenue, one may get the PBT of ABC Limited.
PBT = Revenue - (operating + non operating expenses)
= 5 crore - (2 crore + 1 crore)
= 5 crore - 3 crore
= 2 crore
Now, one is required to calculate the taxable amount.
Taxable amount = PBT x Tax Rate
= 2,00,00,000 x 30/100
Now, one may calculate the PAT upon excluding taxable amounts from PBT.
PAT = PBT - Tax
= 2,00,00,000 - 60,00,000
The profit full form in finance means total profit upon deducting the cost price from the selling price.
For example, if a company sold its goods for INR 10 and incurred a production cost of INR 5. The profit would be measured upon deducting the cost price from the selling price, i.e.
INR 10 - INR 5 = INR 5
The concept of PAT is crucial to analyze the growth and capabilities of an organization. It enables the employer to comprehend the internal and external management of an organization and understand the financial data and development of the company.
The shareholders or investors of the company may assess the take-home profit since one variable, tax amount is already deducted from the profit.
Company management can compare to the operations of other firms. If the PAT is higher than other firms, the company is likely to attract more investors and issue more shares. As a result, it may compete financially with other firms in the same industry.
The investor may also decide the allocation of their financial asset. For example, if the PAT of a company rises, the shareholders are likely to buy more shares. But if there is a fall in PAT, the investor is expected to decide whether or not to persist with the same company.
The profit after tax is the accumulated sum that remains with the company after paying the taxes, liabilities, and operating and non-operating expenses. The amount of profit after tax is utilized for distribution by the entity to its investors and shareholders as a dividend or kept for a provision or reserve as retained earnings. The profit after tax is an important concept for a company to measure the actual growth in the financial field.
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