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Effective tax rate

Income tax expense divided by pre-tax income; what the company actually books as tax, usually different from the statutory headline rate.

The rate moves with the mix of countries the profit is earned in, one-off settlements, tax credits and share-based compensation deductions. A quarter that beats on eps purely because the tax rate fell is not the same as one that beats on demand.

Most companies guide to an expected full-year rate. A change in that guide is a mechanical change to forecast EPS across every model on the street.

Example: Northwind Tools books $33M of tax on $132M of pre-tax income, a 25.0% effective rate. If a research credit cut it to 21%, net income would be $104M instead of $99M and EPS would rise about 5% with no operating change.

Related: income-tax-expense, pre-tax-income, net-income, eps, guidance

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