Which financial metric measures the profitability of a firm after all operating expenses and taxes are deducted?

The correct answer is net operating profit after taxes (NOPAT). NOPAT is a financial metric that provides a clearer picture of a firm's profitability by focusing on the income generated from its operations, minus the taxes that are attributable to that income. This calculation is important because it reflects the actual earnings available to all investors in the firm, including both equity and debt holders, while excluding any effects of capital structure or financing decisions.

NOPAT is derived by taking operating income and adjusting it for taxes but does not take into account any interest expenses, making it a pure measure of operational efficiency and profitability. This makes it useful for comparing companies across different capital structures because it focuses solely on operational performance.

In contrast, other metrics listed may not provide the same clarity regarding profitability after accounting for necessary expenses. Free cash flow, for instance, measures the cash generated by a company's operations after deducting capital expenditures but does not reflect profitability in terms of accounting income and tax effects. Earnings Before Interest and Taxes (EBIT) represents earnings before considering the tax and interest expenses, thus giving an incomplete view of net profitability. Operating income similarly reflects the core profitability from operations but does not directly account for taxes, which can skew the understanding of a firm's true profitability after all