Free cash flow (FCF) is a measure of how much cash a business generates

after accounting for capitalexpenditures such as buildings or equipment. This cash can be used for
expansion, dividends, reducingdebt, or other purposes.
How it works/Example:
The formula for free cash flow is:
FCF = Operating Cash Flow - Capital Expenditures
The data needed to calculate a company's free cash flow is usually on its cash flow statement. For
example, if Company XYZ's cash flow statement reported $15 million of cash from operations and $5
million of capital expenditures for the year, then Company XYZ's free cash flow was $15 million - $5
million = $10 million.
It is important to note that free cash flow relies heavily on the state of a company's cash from
operations, which in turn is heavily influenced by the company's net income. Thus, when the
company has recorded a significant amount of gains or expenses that are not directly related to the
company's normal core business (a one-time gain on the sale of an asset, for example),
the analyst or investor should carefully exclude those from the free cash flow calculation to get a
better picture of the company's normal cash-generating ability.
Investors should also be aware that companies can influence their free cash flow by lengthening the
time they take to pay the bills (thus preserving their cash), shortening the time it takes to collect
what's owed to them (accelerating the receipt of cash), and putting off buying inventory (again,
preserving cash). It is also important to note that companies have some leeway about what items
are or are not considered capital expenditures, and the investor should be aware of this when
comparing the free cash flow of different companies.
Why it Matters:
The presence of free cash flow indicates that a company has cash to expand, develop new products,
buy back stock, pay dividends, or reduce its debt. High or rising free cash flow is often a sign of a
healthy company that is thriving in its current environment. Furthermore, since FCF has a direct
impact on the worth of a company, investors often hunt for companies that have high or improving
free cash flow butundervalued share prices -- the disparity often means the share price will soon
increase.
Free cash flow measures a company's ability to generate cash, which is a fundamental basis for
stock pricing. This is why some people value free cash flow more than just about any other financial
measure out there, including earnings per share.

Net Operating Profit After Tax (NOPAT)

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What it is:
Net operating profit after tax (NOPAT) is a measure of profit that excludes the costs and tax
benefits ofdebt financing. Put another way, NOPAT is earnings before interest and taxes (EBIT)
adjusted for the impact of taxes.
How it works/Example:
Net operating profit after tax (NOPAT) is also referred to as net operating profit less adjusted taxes
(NOPLAT):
NOPAT = Operating Income x (1- Tax Rate)
To see how NOPAT works, consider Company XYZ's income statement:

Using this information and the formula above, we can calculate that Company XYZ's NOPAT is:
NOPAT = $150,000 x (1 - 0.36) = $96,000
Analysts often adjust operating income to convert accrual accounting to cash
accounting or will capitalizesome expenses (i.e., removed them from the income statement and
pretend they were recorded on thebalance sheet instead).
Why it Matters:
Note that NOPAT uses only operating income -- the income before taking interest payments into
account. For this reason, NOPAT is a crucial measure in a variety of financial analyses because it
gives a clearer view of operating efficiency -- a view that is not clouded by how leveraged the
company is or how big of a bank loan it was able to get. This is important, because those interest
payments on debtreduce net income and thus reduce the company's tax expense. Thus, NOPAT
simply looks at how ell a company's core operations did, net of taxes. Accordingly, NOPAT is also
used to calculate Economic Value Added (EVA)

It is important to note that some industries intrinsically have higher costs than others. This is why
comparing NOPATs is generally most meaningful among companies within the same industry, and
the definition of a "high" or "low" ratio should be made within this context.

What is the difference between cash flow and free cash flow?
A corporation's cash flow from operations is available from the first section of the statement of
cash flows. Usually the calculation begins with the accrual accounting net income followed by
adding back depreciation expense and then adjusting for the changes in the balances of current
assets and current liabilities.
Free cash flow is often defined as the cash flow from operations (or net cash flows from
operating activities) minus the cash necessary for capital expenditures.
Occasionally, dividends to stockholders are also deducted.