Term: AFTER-TAX PROFIT

The profit of the company after taxation has been deducted. This figure is shown in the income statement and is used for calculating the return on shareholders’ funds. The company tax rate in South Africa in 2018 was 28% of taxable income – calculated as total income less the total of expenses used in the generation of that income. Sometimes a company will use various allowances in the Income Tax Act to reduce their effective tax rate to less than 28%. This has the effect of temporarily increasing their after-tax income – but in future financial years, when they have to pay the full 28%, their after-tax income will fall. In such a situation, investment analysts will then say that their after-tax income is of “poor quality” because it is unlikely to be repeated in future accounting periods. Dividends are paid out of a company’s after-tax profits and the balance (known as “retained income”) is retained in the business to help finance future growth. Most large listed companies have a “dividend policy” which means that they pay out a set percentage of their after-tax income as dividends.

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