How to Calculate Pre-tax Profit With Net Income and Tax Rate
Original post by Bryan Keythman of Demand Media
A company's pretax profit is the profit it generates after paying all of its expenses, except for taxes. Net income is the company's profit after paying all of its expenses, including taxes. A tax rate is the overall percentage of a company's pretax profit it pays as federal, state and other taxes. If you know a company's net income and tax rate, you can calculate its pretax profit. You can use pretax profit to measure a company's performance before the effect of taxes.
Find a company's tax rate in its most recent 10-K annual report. You can obtain a public company's 10-K annual report for free from the U.S. Securities and Exchange Commission's online EDGAR database. You can also get this information from the investor relations page of a company's website. For example, assume a company's tax rate is 35 percent.
Find the income statement in the company's annual report and identify the amount of its net income, listed at the bottom of the statement. In this example, assume the company's net income is $1 million.
Plug the company's net income and tax rate into the following formula: net income = (1 - tax rate) x pretax profit. In this example, you would get $1 million = (1 - 0.35) x pretax profit.
Subtract the company's tax rate from 1. In this example, subtract 35 percent, or 0.35, from 1 to get 0.65. This leaves $1 million = 0.65 x pretax profit.
Divide net income by your result to calculate the company's pretax profit. In this example, divide $1 million by 0.65 to get $1.5 million in pretax profit.
Compare a company's pretax profit with that of previous periods to determine any changes. A company that is growing and improving its operations should be increasing its pretax profit.
- Principles of Accounting; Chapter Five: Special Issues for Merchants; Larry Walther; 2010
- University of California, Los Angeles -- Anderson School of Management; Numbers 101: Taxes, Investment and Depreciation; Richard P. Rumelt; 2002
About the Author
Bryan Keythman has performed stock investment research and writing for a consulting firm since 2008. He also has prior experience sourcing and underwriting commercial real-estate investment and development opportunities for a commercial real-estate developer. Keythman holds a Bachelor of Science in finance.
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