Question
The NOPAT (Net Operating Profit After Tax) margin is a key driver of economic earnings. It measures the profitability of a company after accounting for operating costs and taxes, but before considering the cost of capital. A higher NOPAT margin indicates that a company is more efficient at converting sales into actual profit. This efficiency can lead to higher economic earnings, which are a more comprehensive measure of profitability as they also consider the cost of capital. Therefore, the NOPAT margin can significantly influence a company's economic earnings.
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2020 was a challenging year but it was also a year of learning. New Constructs – a company that provides stock research tools on the market, published an important report that was featured in Forbes. The report analyzes the drivers of economic earnings: ROIC, NOPAT margin, invested capital turns and the weighted average cost of capital (WACC) for the S&P 500 – a stock market index that measures the stock performance of 500 large companies.
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