Calculating free cash flows is an essential part of understanding the debt capacity of a business, or as well as to value it from a discounted cash flow point of view. We'll start by the revenue number because the revenues typically is the underlying driver of a business, and once we've got the revenues number, then we can calculate the operating expenses, which will subtract to give us the operating profit. Now, one of the reasons why free cash flow is called free cash flow is that the free means that we have the cash flow that is freely available to service both debt holders and equity holders. So this rather artificially assumes that the business has no debt financing when you are calculating free cash flows. Because what you are trying to do is establish the cash flow available to service both debt and equity holders. So this means what we do next is we tax EBIT. In other words, we are assuming that there's no interest expense or interest income in the business. And that means we get a number that we won't call net income. We will, in this case, call it net operating profit after tax. So that's often an abbreviated to NOPAT. So net operating profit after tax. And sometimes, this will be known as unlevered net income. In other words, this is the amount of net income that the firm would have assuming it had no interest. Now, once we've got that number, then effectively what we're doing is we're taking the rest of the cash flow from operations and the rest of the cash flow from investing activities. But rather than starting at net income, we're starting at unlevered net income or NOPAT. So, of course, we will add back the changes in operating working capital, we'll add back depreciation and amortization because they're non-cash. We will subtract the investment in capital expenditure and potentially any other longer term assets or longer term liabilities that the business needs for its operating activities.

And you can think of that block, the changes in the operating working capital, the depreciation and amortization, the CapEx, and the changes in other operating assets and liabilities as really the kind of amount that needs to be reinvested back into the business. So the business generates the unlevered net income and some of that needs to be reinvested. Anything that is surplus is effectively free cash flows or freely available to service both debt holders and equity holders.