In 30 seconds
- Free cash flow is operating cash flow minus capital expenditure (capex).
- It's the cash the company can pay out or use to pay down debt, and it's harder to dress up than earnings.
- Compare FCF with net income: for a typical company, converting 80% or more is a good sign.
- Low FCF because of growth capex, like Microsoft's in 2026, isn't the same as chronically negative FCF like Intel's.
- Stock-based compensation inflates operating cash flow: at Alphabet it was equal to a third of 2025 FCF.
Introduction
Microsoft closed fiscal 2026 (June 30, 2026) with net income of $133,749 million, the biggest in its history. Its free cash flow was $66,987 million: half as much. The gap is explained by investment: $115,948 million on data centers, servers and chips, against $44,477 million two years earlier. Look only at earnings and you miss half the story.
Explanation
Free cash flow (FCF) is the money a company has left after paying for everything it needs to run and to maintain or expand its facilities. It's the cash it can pay out as dividends, use to buy back shares, put toward its debt or simply keep. No more, no less.
Think about your own finances. Your paycheck is the profit. But if this year you had to replace the furnace and buy a car to get to work, what you can actually save is a lot less. Whatever is left over is your free cash flow. A company works the same way: accounting profit spreads the cost of machinery over several years (depreciation), but the cash goes out the day it pays for it.
Why does a value investor care so much? Because earnings involve judgment calls, and cash involves far fewer. Depreciation, provisions and the timing of revenue recognition are all accounting decisions. Money moving in and out of the bank account is not. That's why discounted cash flow (DCF) models value a company on FCF rather than earnings.
How to calculate it
Open the cash flow statement, the third major financial statement alongside the income statement and the balance sheet. It has three sections: operating, investing and financing activities. From the first, take the total, the operating cash flow: the cash the business has generated after paying suppliers, salaries and taxes. From the second, take only the line for purchases of property, plant and equipment, the capital expenditure (capex). Subtract. That's FCF.
A handy way to compare companies of different sizes is to divide FCF by market capitalization: the free cash flow yield (FCF yield). A 5% yield means the company generates free cash each year equal to 5% of its stock market value.
Formula
FCF = Operating cash flow − Capital expenditure (capex)
Operating cash flow = total from operating activities (cash flow statement)
Capex = purchases of property, plant and equipment (investing activities)
FCF yield = FCF / Market capitalization
Example
The table compares the free cash flow yield of four big tech platforms that are investing heavily in artificial intelligence, on a trailing-twelve-month basis as of October 4, 2026. Read it as the percentage of their stock market value they generate in free cash over a year. Meta, 2.2%. Microsoft, 1.7%. Alphabet, 1.3%. Amazon, −0.4%: its capex over the trailing twelve months exceeds what its business generates. None of them reaches the 3% that Kaplio's Summary asks of an internet platform. Today the market is paying for the cash it expects these investments to produce, not for the cash they generate now.
Step by step: Microsoft, three fiscal years (10-K, millions of dollars, years ended June 30):
| Fiscal year | Operating cash flow | Capex | FCF |
|---|---|---|---|
| 2024 | 118,548 | 44,477 | 74,071 |
| 2025 | 136,162 | 64,551 | 71,611 |
| 2026 | 182,935 | 115,948 | 66,987 |
The business keeps generating more cash: operating cash flow grew 54% in two years. But capex grew 2.6-fold, and FCF fell. Set FCF for 2026 against that year's net income: 66,987 versus $133,749 million. Only half of the profit turned into free cash.
Your turn. Alphabet, 2025 accounts. Its operating cash flow was $164,713 million. Its purchases of property and equipment came to $91,447 million. Its net income, $132,170 million. Work out its FCF and what percentage of net income it represents.
Before you look: do you think Alphabet converts more of its profit into cash than Visa does? Visa, in fiscal 2025, generated $21,577 million of FCF on net income of $20,058 million: more cash than profit. (Alphabet: $73,266 million of FCF, a little over half its net income.)
Real-data example
| Company | Ticker | FCF yield |
|---|---|---|
| Microsoft Corporation | MSFT | 1.7% |
| Alphabet Inc. | GOOGL | 1.3% |
| Meta Platforms, Inc. | META | 2.2% |
| Amazon.com, Inc. | AMZN | -0.4% |
How to read it
How to read it
The most useful measure is conversion: FCF divided by net income. The "Good" column shows the bar used by the Summary on Kaplio's stock pages; the other bands are a rough guide.
| Sector | Weak | Normal | Good |
|---|---|---|---|
| Companies in general | below 60% | 60-80% | 80% or more |
| Industrials | below 65% | 65-85% | 85% or more |
| Consumer cyclicals and financial services | below 70% | 70-90% | 90% or more |
For FCF yield, the bar for a mature telecom is 6% and for a fast-growing internet platform, 3%: investors accept less cash today from a company that's growing. Always look at several years. Low FCF in the middle of an expansion is not the same as chronically low FCF.
Pitfalls and limitations
1. Growth capex versus maintenance capex. Microsoft didn't spend $115,948 million in fiscal 2026 to stand still; it spent it to grow. If that investment pays off, today's FCF understates the business. If it doesn't, the money is gone. The accounts don't separate the two; you have to estimate the split yourself, for example by comparing capex with depreciation.
2. Stock-based compensation. Paying employees in shares doesn't use cash, so it inflates operating cash flow. But it dilutes shareholders. Alphabet's stock-based compensation came to $24,953 million in 2025. That's a third of all the free cash it generated that year. Some investors subtract it from FCF, and they have a point.
3. Working capital. Paying suppliers later or collecting from customers sooner lifts operating cash flow for a year without the business getting any better. If FCF jumps and sales don't, look at the changes in inventory, receivables and payables.
4. Acquisitions. Buying a company doesn't count as capex. A business that grows by acquisition can show handsome FCF while spending billions a line further down.
Case in point: Intel and the dividend that didn't hold
In 2024 Intel's operating cash flow was $8,288 million. That same year it invested $23,944 million in chip plants. The result: negative free cash flow, an outflow of $15,656 million in 2024. With cash draining at that pace, keeping the dividend meant borrowing to pay it, and in August 2024 Intel suspended it. Earnings were already deteriorating, but the clearest warning had been sitting in the cash flow statement for a while. In 2025 FCF stayed negative, with an outflow of $4,949 million. Notice the contrast with Microsoft: both invest heavily, but Microsoft's operating cash flow covers its capex comfortably and Intel's doesn't.
If you want to see how FCF is used to estimate what a company is worth, carry on with the DCF lesson; and to see why EBITDA isn't cash, read the EBITDA lesson.
Practice on Kaplio
Frequently asked questions
How do you calculate FCF?
Open the cash flow statement. Take the total from operating activities, which is operating cash flow, and subtract the purchases of property and equipment listed under investing activities: that's capex. In fiscal 2026 Microsoft generated $182,935 million from operations and invested $115,948 million, leaving $66,987 million of free cash flow.
Is free cash flow the same as profit?
No. Profit is an accounting figure: it spreads the cost of equipment over several years and depends on judgment calls such as provisions. Free cash flow is the cash actually left after operations and capex. The two can diverge sharply. In fiscal 2026 Microsoft turned only half of its $133,749 million of net income into free cash flow.
What is the difference between cash flow and free cash flow?
Operating cash flow is the cash the business generates after paying suppliers, salaries and taxes. Free cash flow goes one step further and subtracts capital expenditure, the money spent maintaining and expanding facilities. Only free cash flow is truly available for dividends, buybacks or paying down debt. Strong operating cash flow can still leave weak FCF.
What is a good amount of free cash flow?
Judge it relative to profit and price, not in raw dollars. Kaplio's Summary treats converting 80% or more of net income into free cash flow as good for a typical company. Measured against market value, an FCF yield of 6% is the bar for a mature telecom, and 3% for a fast-growing internet platform.