Is Profit After-Tax (PAT) the same as Net Asset?

Finance ManagementBanking & FinanceGrowth & Empowerment

Although Profit After-Tax (PAT) and Net Asset seem to be the same, there is a difference between the two. PAT is related more to the operational efficiency of a firm while net assets are related to the value of assets.

The two terms, however, can be misleading. So, in order to make it simpler, let us check the meaning of the two terms in detail.

Profit After-Tax (PAT)

PAT is the amount a company retains after paying all the non-operating and operating taxes, expenses, and liabilities. This is the profit that is distributed among the shareholders of the company. Alternately, a company may skip paying dividends and keep them as retained earnings for use of the company in the future.

PAT is the measure of the operational efficiency of a company. It shows the health of a company after the payment of all the outstanding payable amounts, and therefore is an important part of the company’s overall business strategy.

Analysts compare the PAT figures of two companies from the same industry to check the potential of each company and determine which one is better in terms of overall strength to withstand the troubled economic times more easily. The PAT is used in a sophisticated form to calculate the PAT margins in order to gain more insight into a company’s overall condition.

Net Asset

The net asset is the amount that is left in the company’s account after payment to lenders and shareholders. It is also called equity; this is the amount of money earned by a company that has not been distributed to the owners. This fund is usually used to propel the growth of the company.

Net asset refers to the amount of money the owners claim to belong to them.

$$\mathrm{Net\: Assets\, =\, Assets\, -\, Liabilities}$$

Where,

$$\mathrm{Assets\, =\, Liabilities\, +\, Owners\: Equity}$$

So,

$$\mathrm{Net\: Assets\, =\, (Liabilities\, +\, Owner's\: Equity)\, -\, Liabilities\, =\, Owner's \: Equity}$$

Therefore, the net asset is owned by the shareholders of the company. The net asset is, therefore, an indicator of the amount of money in the fund the owners own.

PAT versus Net Assets

Key differences between PAT and Net Assets are as follows −

  • Payable Money Amount

It can be seen that the major difference between PAT and Net Assets is the amount of money that is payable to the lenders and loan providers. It can be noted that PAT is the net income that is derived after paying all the liabilities and taxes. On the other hand, Net Assets are the value of assets when certain other deductions are made to the total earnings figure.

So, PAT = Net Income = The bottom line that remains after payment of all deductions from the revenues.

Net Asset = The value of assets after certain deductions of liabilities are carried out.

  • More Investments, More Net Asset Figures

Net asset figures can be increased by making more investments in the company. Owners of the company may leave more money in the business account to increase the value of net assets. On the contrary. If shareholders are paid or dividends are distributed among shareholders, the value of net assets goes down.

  • Adoption of Tax Shield Increases PAT

The value of PAT can be increased by adopting more tax shields. That is when increased interest is paid, the value of taxes goes down. This is known as a tax shield. The tax shield may look as negligible for smaller companies, but for big corporates, the tax shield is a palpable figure.

So, saving money via a tax shield is a popular measure to increase PAT. To do so, the tax shield must be added back to revenues to get a bigger chunk of PAT.

Conclusion

Both PAT and Net Assets are important for companies and therefore, one must know how to derive them. Knowing the difference between the two can also help in solving critical queries of finances.

raja
Updated on 17-May-2022 08:35:05

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