Before calculating a free cash flow, we need to understand what a free cash flow is Well first of all it's going to be cash flows generated by the enterprise value part of your business And those cash flows are free from the impact of financing decisions or they're unlevered So we're not looking at cash flows after interest, we're looking at cash flows before interest There are no financing issues involved in these cash flows Another way to look at free cash flows is the cash flow available to pay all providers of finance Debt and equity after satisfying all investment requirements By investment requirements, we mean things like buying property, plant and equipment (so capital expenditure) Investing in inventory, those kind of things So it's the cash that's available after buying all those things that could be returned to your debtholders as interest or debt repayments or shareholders, as dividends maybe So these cash flows are generated by the operational business, that's your enterprise value They are your operating profits after tax. Remember taxes has to be paid, so that has to be gotten rid of before we can start returning cash flows to our financiers Refer to this is NOPAT (net operating profit after taxes) or EBIAT (earnings before interest but after tax) At the start of our forecast free cash flow calculation, we have EBIT so that's operating profit adjusted for any non-recurring items But from that EBIT, we then subtract off tax on EBIT. Now that's not the same as your tax expense We want to take EBIT and then multiply that by the long run tax rate (your effective tax rate) That gets you to NOPAT, your net operating profits after taxes or EBIAT We then say, is that really the cash flow from the business? Well no, we've included depreciation and amortization so far So we need to add that back and instead subtract off real cash flows that have gone into the operations of the business So capex is a great example, we've invested in the operations of the business by buying things like property plant and equipment We also need to subtract any increases in operating working capital Or add any decreases And also look at any other changes in other operating assets or liabilities Once we have gotten rid of all of those cash flows, we have finally gotten through to the free cash flow Cash flow produced by operations and which could be returned to our financiers