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. If you own a company or work as an accountant for one, monitoring pretax profits can give you a great idea of how the company is performing over time.
Determine Company Tax Rate
Before you can get started, you'll need to know the tax rate the business in question is paying. You should be able to find that information 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.
Calculate Net Income
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.
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Compare for Changes
To truly get a feel for how profitable a company is, you'll need to compare that company over time. This simply involves putting the current period's pretax profit up against that of previous periods to determine any changes. A company that is growing and improving its operations should be increasing its pretax profit. Most importantly, you'll want to continue to compare these numbers moving forward to ensure the company continues to remain profitable.
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