378  Using Multiples
NOPAT vs. EBITA
Analysts and investors often use enterprise value to EBITA instead of NOPAT 
because there is no need to figure out the operating taxes on EBITA. (Reported 
taxes are not usually a good predictor of operating taxes, because they in-
clude nonoperating items. Therefore, most analysts ignore taxes altogether.) 
We often use EBITA because it’s common practice and works well when all 
the companies in the peer group have the same operating tax rate, as when 
they all operate within a single tax jurisdiction. However, when tax rates are 
different, NOPAT is a better measure to use.
U.S. oil and gas pipeline companies provide a classic example. Until the 
mid-2010s, many pipeline companies were organized as master limited part-
nerships (MLPs), which eliminated an entire layer of taxation compared with 
pipeline companies organized as regular corporations, called C corporations 
in the U.S. tax code. Unlike C corporations, MLPs pay no corporate income 
taxes; rather, investors pay taxes on their share of the profits. Exhibit 18.8 
shows that the stock market clearly reflected these tax differences when valu-
ing companies in these industries. NOPAT multiples across all the companies 
are in a narrow range of 19 to 25 times. The EBITA multiples, however, show 
a clear delineation between the regular corporations and the MLPs. While the 
EBITA multiples for the MLPs remain the same, at 19 to 25 times, the multiples 
for regular corporations drop to 13 to 14 times. Clearly, the NOPAT multiples 
are superior in this case.
Exhibit 18.8  Enterprise Value to EBITA vs. Enterprise Value to NOPAT
U.S. pipeline companies, June 2013
Atmos Energy
Quester
Southwest Gas
AGL Resources
Regular corporations (C corporations)
Magellan Midstream Partners
ONEOK Partners
Williams Partners
Plains All American Pipeline
Energy Transfer Partners
Kinder Morgan Energy Partners
Enterprise Products Partners
Master limited partnerships (MLPs)
14
13
13
14
20
19
19
20
25
22
19
EV/EBITA
22
20
21
22
20
19
19
20
25
22
19
EV/NOPAT

Use net enterprise ValUe diVided by adjUsted ebita or nopat 379
 The stock market recognizes differences in tax rates not only for pipe-
line companies but across all sectors. The difference between a company’s 
post- and pretax earnings valuation multiple simply follows from the com-
pany’s tax rate. If the stock market correctly refl ects taxation in company 
valuations, we would expect that for companies with higher tax rates, the 
difference between their pre- and posttax earnings multiples also would be 
bigger. This is indeed the pattern that we found when examining the market 
valuations of the largest U.S. companies between 2013 and 2017 (before the 
Tax Cuts and Jobs Act of 2017). Exhibit 18.9 shows the average difference in 
pretax earnings multiples (EV/EBIT) and posttax earnings multiples (P/E) 
over the fi ve-year period for companies categorized according to their in-
come tax rates. As predicted, the difference between the multiples steadily 
increases with the tax rate that a company pays. Differences in tax rates 
clearly matter for market valuation. Thus, when companies face different tax 
rates, they should not be valued at the same EBITA multiple (or any other 
pretax earnings multiple). 
 This is an important consideration for international comparisons, because 
corporate tax rates vary widely from country to country. For example, as of 
2019, the Irish corporate tax rate is one of the lowest, at 12.5 percent, the U.S. 
tax rate is at 21.0 percent, and the French tax rate is one of the highest, at 
34.4 percent. Because of such variations, companies in the same industry with 
a different geographic mix of operations can have different tax rates, which 
must be factored into their valuation using multiples. If the tax rates are differ-
ent across peers, use net enterprise value to NOPAT rather than net enterprise 
value to EBITA. 
Exhibit 18.9 Difference between Pre- and Posttax Earnings Multiples for U.S. Stock 
Market
2013–2017, average
17.8
<15
14.8
18.5
15–25
13.7
18.7
25–35
13.5
19.2
>35
EV/EBIT
13.1
P/E Multiple versus EV/EBIT Multiple
Effective Income Tax Rate, %
P/E
Source: S&P CapitaliQ