Calculating NOPAT or Net Operating Profit After Taxes is done primarily to compare operating revenues before debt. The simplest calculation is: NOPAT = operating income x (1 - Tax Rate). Companies report net income in a variety of ways. It is also used as the basis for economic value added (EVA) which is a separate valuation metric. Computing NOPAT requires three basic steps.
Find earnings before interest and taxes (EBIT). Find net income and add back interest and income tax expense. The goal here is to calculate a "de-levered" net income amount. You want the income that goes to all holders of capital in the company, including creditors.
Calculate key adjustments to convert from accrual to cash basis accounting. There are many accounting conventions based on non-cash events such as depreciation. Depreciation is an expense, but it is not an outlay of cash. As such, it is added back to net income in order to arrive at a cash basis of income. Add back anything that does not represent a real cash outflow. This will depend on the company, but examples include LIFO Reserve or Allowance for Bad Debt.
Determine capitalized investments. Capitalization refers to turning an expense into an investment. For instance, long term leases can be capitalized over the life of the lease and therefore moved to the balance sheet. Adding back any interest on operating leases is usually the largest component of this adjustment.
Take EBIT and add back adjustments for accrual based accounting and allocations for capitalized investments. This is a "cleaned" EBIT number that should represent real cash movements.
Subtract cash from operating taxes. There is a difference between the amount companies report paying for taxes and the amount they actually pay for taxes. This difference is due to accrual accounting. Not all public companies report this number, but if they do it can be found in the notes to the income statement in the 10K.
Remember, the point of the Steps 3 and 4 is to add back non-cash expenses and add back expenses that are treated as investments or "capitalized."