Free Cash Flow (FCF): Formula and Nine Real 10-Ks
Free cash flow (FCF) is the cash a business generates from its operations minus what it spends on property and equipment: operating cash flow minus capital spending. It is the cash left over for dividends, buybacks, debt repayment or acquisitions after the business has paid to keep itself running and growing.
Free cash flow is the number many investors trust more than earnings, because cash is harder to shape with accounting choices than profit is. It is also one of the easiest numbers to misread, since the same subtraction mixes the cost of standing still with the cost of growing.
This page sets out the formula, then applies it to the latest annual reports of nine large US companies, taken straight from their filings with the SEC. The spread between them is the lesson.
How it works
Start with operating cash flow. This is the cash the business produced from selling its goods and services in the year, after paying suppliers, staff, interest and tax. It is the first section of the cash flow statement, and it begins from net income, then adds back non-cash charges such as depreciation and adjusts for changes in working capital.
Subtract capital spending. Capital spending, often called capex, is cash paid for property, plant and equipment: stores, warehouses, factories, data centers, servers. It sits in the investing section of the same statement.
Free cash flow = operating cash flow - capital spending. What remains is the cash the company could hand back to shareholders, use to repay debt, or spend on acquisitions without borrowing. Whether it actually does any of those is a separate decision.
Three ratios turn the dollar figure into something comparable:
- FCF conversion = free cash flow / net income. How much of the reported profit showed up as spare cash.
- FCF margin = free cash flow / revenue. How many cents of each sales dollar are left over.
- FCF yield = free cash flow / market capitalization. How much spare cash the company produces for each dollar the market values it at, the cash version of an earnings yield.
There is no single official definition. Free cash flow is not a line required by US accounting rules, so companies and data providers each choose their own version. Some subtract only maintenance spending, some net off the proceeds of selling assets, some subtract lease payments too. This page uses the plainest version, gross purchases of property and equipment, for every company, so the figures below are comparable with each other but may not match a company’s own press release.
A worked example
Costco’s fiscal year ended on 31 Aug 2025. Its 10-K reported net cash from operating activities of $13.335 billion and purchases of property and equipment of $5.498 billion.
Free cash flow = $13.335 billion - $5.498 billion = $7.837 billion.
Now the three ratios. Net income was $8.099 billion, so conversion was $7.837 / $8.099 = 96.8%. Revenue was $275.235 billion, so the FCF margin was $7.837 / $275.235 = 2.8%. And with Costco’s market value at $409.2 billion on 25 Sep 2026, the FCF yield was $7.837 / $409.2 = 1.9%.
What the three numbers say together: Costco turns nearly all of its profit into spare cash, but that profit is a thin slice of a very large revenue figure, and the market prices it at more than fifty times that cash. None of the three is good or bad on its own; they describe the business.
The original data
Each company’s latest annual report, from its XBRL filing with the SEC, downloaded 25 Sep 2026. Operating cash flow is net cash provided by operating activities. Capital spending is the gross purchases of property and equipment line, with no asset-sale proceeds netted off; Nvidia’s version of that line also includes intangible assets. Dollar figures are in billions.
| Company | Fiscal year end | Operating cash flow | Capital spending | Free cash flow | Net income | FCF / net income | FCF margin |
|---|---|---|---|---|---|---|---|
| Apple | 27 Sep 2025 | $111.5 | $12.7 | $98.8 | $112.0 | 88.2% | 23.7% |
| Nvidia | 25 Jan 2026 | $102.7 | $6.0 | $96.7 | $120.1 | 80.5% | 44.8% |
| Microsoft | 30 Jun 2026 | $182.9 | $115.9 | $67.0 | $133.7 | 50.1% | 20.2% |
| Exxon Mobil | 31 Dec 2025 | $52.0 | $28.4 | $23.6 | $28.8 | 81.9% | 7.1% |
| Johnson & Johnson | 28 Dec 2025 | $24.5 | $4.8 | $19.7 | $26.8 | 73.5% | 20.9% |
| Walmart | 31 Jan 2026 | $41.6 | $26.6 | $14.9 | $21.9 | 68.2% | 2.1% |
| Costco | 31 Aug 2025 | $13.3 | $5.5 | $7.8 | $8.1 | 96.8% | 2.8% |
| Amazon | 31 Dec 2025 | $139.5 | $131.8 | $7.7 | $77.7 | 9.9% | 1.1% |
| Coca-Cola | 31 Dec 2025 | $7.4 | $2.1 | $5.3 | $13.1 | 40.4% | 11.0% |
Together the nine produced $341.5 billion of free cash flow on $542.2 billion of net income, so 63.0% of their combined profit arrived as spare cash. The median conversion was 73.5% and the median FCF margin 11.0%.
Nvidia’s margin stands out: 44.8% of revenue left as free cash, because it spent only $6.0 billion on property, equipment and intangible assets, 5.9% of its operating cash flow. Its conversion was still only 80.5%, because its operating cash flow, $102.7 billion, was itself below its net income of $120.1 billion.
The FCF yield for the seven with a market value in the same file ran from Johnson & Johnson’s 3.01% to Amazon’s 0.29%, with a median of 1.78%. Apple was at 1.98%, Costco 1.92%, Nvidia 1.78%, Microsoft 1.75% and Walmart 1.74%. Each yield sets the latest fiscal year’s cash against the market value on 25 Sep 2026, so the two sides are months apart; treat them as a snapshot, not a valuation. The inputs for every company are in the free cash flow table.
Where the cash went: Amazon and Microsoft
The biggest gaps in the table come from spending on data centers, and the same two filings, read year by year from each year’s own 10-K, show how quickly it built up.
Microsoft’s operating cash flow rose from $89.04 billion in fiscal 2022 to $182.94 billion in fiscal 2026. Over the same years its capital spending went from $23.89 billion to $115.95 billion, so free cash flow went from $65.15 billion to only $66.99 billion. Capital spending took 26.8% of operating cash in fiscal 2022 and 63.4% in fiscal 2026.
Amazon’s path is steeper. Capital spending took 43.7% of its operating cash in 2018, 94.5% in 2025, and more than all of it in 2021 and 2022, when free cash flow was -$14.73 billion and -$16.89 billion. In 2024 Amazon produced $32.88 billion of free cash flow; in 2025, with operating cash flow up to $139.51 billion, it produced $7.70 billion.
Year by year, the share of operating cash spent on property and equipment ran 43.7%, 43.8%, 60.8%, 131.8%, 136.1%, 62.1%, 71.6% and 94.5% at Amazon from 2018 to 2025, and 26.5%, 26.7%, 25.4%, 26.9%, 26.8%, 32.1%, 37.5%, 47.4% and 63.4% at Microsoft from fiscal 2018 to fiscal 2026.
Neither company’s profit fell to match. Microsoft’s net income rose from $72.74 billion to $133.75 billion across those four fiscal years. That is the whole point of watching both numbers: the income statement spreads the cost of a data center over its useful life as depreciation, while the cash flow statement records the full cost in the year it is paid. Every year of each company is in the Amazon and Microsoft table.
When it fails
It punishes growth that may pay off. A low free cash flow can mean a company is investing heavily in something that will earn cash later, or it can mean the business needs ever more spending just to stand still. The subtraction cannot tell the two apart. The split between maintenance and growth spending is not reported separately, so any such split is an estimate.
It flatters a company that stops investing. Cutting capital spending lifts free cash flow at once, and the cost of aging equipment or lost capacity shows up years later. A sudden improvement deserves a look at the capital spending line before it is counted as good news.
It ignores pay in shares. Stock-based compensation is a non-cash charge, so it is added back inside operating cash flow, even though issuing shares to staff dilutes owners. Amazon’s 2025 filing shows $19.467 billion of it. Take that off its $7.695 billion of free cash flow and the result is -$11.772 billion.
It swings with working capital. Collecting from customers faster or paying suppliers later raises operating cash flow for a year without the business changing. Coca-Cola’s operating cash flow was $7.408 billion in 2025 against net income of $13.107 billion, and $6.805 billion against $10.631 billion the year before. A gap that size is a prompt to read the company’s own explanation in its filing, not a verdict.
It means little for banks. For a lender, making loans and holding trading assets are the business itself, and those flows run through the cash flow statement in ways that make operating cash flow swing by tens of billions. JPMorgan Chase reported operating cash flow of -$147.782 billion in 2025 and -$42.012 billion in 2024, while earning $57.048 billion and $58.471 billion. It is left out of the table above for that reason.
Definitions differ. A company’s own “free cash flow” in an earnings release may net off asset sales or leases and will not match a figure computed here. Compare like with like, from the same formula.
Related
The cash flow statement explains where operating cash flow and capital spending come from, and the step-by-step guide to reading a cash flow statement walks through a real one. A discounted cash flow valuation is built on forecasts of this number.
Stock buybacks are one of the main uses of free cash flow, and EBITDA is the profit measure that leaves out the capital spending this page subtracts. Return on equity uses the same ten filings to show what profit does to the balance sheet.
I read free cash flow next to capital spending, never on its own. A company that cuts investment can make its free cash flow jump for a year or two, so when the number improves I look at what stopped being spent before I count it as progress.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.