What Is Free Cash Flow? How FCF Is Calculated and Why Definitions Differ

Free cash flow is the cash a company's operations bring in minus what it spends on property and equipment, a common measure with no single official definition.

Free cash flow, often shortened to FCF, is the number many analysts reach for when they want to know how much cash a business produced after paying for the assets it needs. This page covers the basic calculation and where its two inputs come from, a worked example from Microsoft's 10-K for the year to June 2026, the SEC's position on the measure, the ways companies and analysts define it differently, and how Kresmion calculates it. It is descriptive throughout.

The basic calculation

The common form takes two lines from the cash flow statement:

Free cash flow = cash from operating activities minus capital expenditure

• Cash from operating activities is the cash the business generated in the period: net income adjusted for non-cash items such as depreciation and stock-based compensation, and for changes in receivables, payables, inventory and unearned revenue.
• Capital expenditure, or capex, is the cash spent on property and equipment, shown in the investing section, often as purchases of property and equipment or additions to property and equipment.

The idea behind the subtraction is that a business must keep spending on equipment and buildings to stay in operation and to grow, so the cash it produces is not all available for other uses. What is left can go to dividends, share repurchases, debt repayment, acquisitions, or simply build up as cash.

A worked example: Microsoft

Microsoft's fiscal year ends on 30 June. Its 10-K for the year ended 30 June 2026, filed on 29 July 2026, gives three years of both inputs. In millions of dollars:

Operating cash rose 34.4% in fiscal 2026, yet free cash flow fell, because capital spending rose 79.6%, to $115,948 million. The 10-K states Microsoft's intention to continue investing in capital expenditures to support growth in its cloud offerings and its AI training and other infrastructure. Free cash flow was 20.2% of fiscal 2026 revenue of $331,839 million, and about half of net income of $133,749 million.

The same year, Microsoft paid $26,445 million of dividends and spent $22,271 million on share repurchases, a total of $48,716 million, out of $66,987 million of free cash flow on this definition.

A similar pattern appears at Amazon, whose own free cash flow figure fell from $38.2 billion in the twelve months to December 2024 to $11.2 billion in the twelve months to December 2025 as its spending on property and equipment rose, a case covered in how Amazon makes money.

What the SEC says about it

Free cash flow is not defined by US GAAP. It does not appear on the face of the cash flow statement, and a company that publishes it is presenting a non-GAAP financial measure. Regulation G then requires the company to present the most directly comparable GAAP measure, normally operating cash flow, with a reconciliation between the two, and Item 10(e) of Regulation S-K adds requirements for filings with the SEC.

The SEC staff addressed free cash flow directly in its compliance and disclosure interpretations on non-GAAP measures, Question 102.07. The staff describes it as typically calculated as operating cash flow less capital expenditures and says the deduction does not breach the SEC's non-GAAP prohibitions, but warns that the measure does not have a uniform definition and its title does not describe how it is calculated. A clear description of the calculation and a reconciliation should accompany it. Companies should avoid implying it is the residual cash available for discretionary spending, since many have mandatory debt service or other commitments not deducted from it. And because the staff treats it as a liquidity measure, a gauge of cash available rather than of profit, it must not be presented on a per-share basis.

Why definitions differ

Two companies, or two analysts, can report different free cash flow for the same year because they make different choices.

• Gross or net capex. Amazon's free cash flow subtracts purchases of property and equipment net of proceeds from sales and incentives. The common form subtracts purchases alone.
• Leased assets. A datacenter taken on through a finance lease is not bought for cash, so it does not appear in capex. Microsoft's leases note records $24,608 million of right-of-use assets obtained for new finance lease obligations in fiscal 2026. Some analysts subtract finance lease principal payments, or the leased assets themselves, to put leased and owned capacity on the same footing.
• Timing of payment. Capex counts cash paid. Microsoft's Note 6 says $26.7 billion of property and equipment purchases were still in accounts payable at 30 June 2026, spending already committed that will reach the cash flow statement when it is paid.
• Stock-based compensation. Operating cash flow adds back stock-based pay, $12,405 million at Microsoft in fiscal 2026, because it is paid in shares. The cost shows up instead as dilution, or as cash spent on buybacks to offset it. Some analysts subtract it.
• Acquisitions. Buying another company is an investing outflow but not capex, so it is left out of the common form even when a company grows mainly by acquisition.
• Interest. Under US GAAP, interest paid sits inside operating cash flow. IFRS reporters have had a choice of section until amendments to IAS 7 that come with IFRS 18, from 2027, so the same interest can be inside one company's free cash flow and outside another's.
• Levered and unlevered. Valuation work separates free cash flow to the firm, before payments to lenders, from free cash flow to equity, after interest and debt repayments and with new borrowing added. Each is built from the same statements with different adjustments.

Each version has its uses, which is why the SEC staff asks companies to state their definition and why a quoted free cash flow figure is only comparable to another built the same way.

Free cash flow yield

Free cash flow yield most often divides free cash flow by the company's market capitalization, the share price times the shares outstanding. It sets the cash a business produced against what the market pays for its equity, in the same way an earnings yield, earnings per share divided by the share price, inverts the P/E ratio. Because market capitalization moves with the share price every day and free cash flow is reported each quarter, the yield changes with both, and it carries every definitional choice of its numerator.

Free cash flow in Kresmion

On a company's page in Kresmion's app, open with a free account, the Financials tab shows free cash flow as a calculated row in the Standard cash flow statement: operating cash flow less capital expenditure, with capital expenditure taken as a positive outflow. For Microsoft in fiscal 2026 it reads $66,987 million, the same figure as the worked example above. The row is blank in any column where either input is missing from the filing's XBRL data, rather than being filled with an estimate. It is Kresmion's own calculation on the common definition, so it can differ from a free cash flow figure a company publishes on its own definition, such as Amazon's.

In Kresmion's spreadsheet, =KRM.FIN("MSFT","fcf","FY2026") returns the same number in a cell, and the period "LTM" adds up the latest four quarters of both inputs when all four exist and are consecutive; the guide describes the periods it accepts. The relative value tool compares a company with its sub-industry peers on the figures from its latest annual filing; its public table shows eight metrics, and with a free account it extends to thirty-one, including free cash flow and free cash flow yield.

What free cash flow does not tell you

• It is not a GAAP figure. There is no audited free cash flow line, and every published version depends on its issuer's definition.
• It does not show what is discretionary. Debt repayments, lease payments and other commitments still have to be met from it, as the SEC staff points out.
• One year can mislead. A single year of heavy investment can push free cash flow well below what the business produces when spending is steadier.
• It cannot tell maintenance from growth. Spending to keep current operations running and spending to expand them are subtracted alike.
• It can be lifted by timing. Collecting receivables early, paying suppliers late or leasing instead of buying all raise reported free cash flow without changing the underlying operations.

Key takeaways

Frequently asked questions

How do you calculate free cash flow?

Take cash from operating activities from the cash flow statement and subtract capital expenditure, the cash spent on property and equipment, from the investing section. For Microsoft in fiscal 2026 that is $182,935 million less $115,948 million, or $66,987 million.

What is the difference between free cash flow and operating cash flow?

Operating cash flow is the cash the business generated before any spending on long-lived assets. Free cash flow subtracts capital expenditure from it. Operating cash flow is a GAAP line on the cash flow statement; free cash flow is a non-GAAP measure built from it.

Can free cash flow be negative?

Yes. A company whose capital spending exceeds the cash its operations bring in reports negative free cash flow. That can come from heavy investment in new capacity, from losses, or from a large build-up of receivables or inventory, and the cash flow statement shows which.

What is the difference between free cash flow and net income?

Net income is accrual profit from the income statement and includes non-cash items such as depreciation and stock-based compensation. Free cash flow is built from cash actually received and paid, and it deducts the full cash cost of new equipment in the year it is paid rather than spreading it over the asset's life.

Does high free cash flow mean a stock will rise?

No. Free cash flow describes cash a business produced in a past period. It does not forecast the share price, and a high figure can reflect a pause in investment or favourable timing rather than a lasting change.

This page is information, not investment advice.

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Source: Microsoft Corporation, Form 10-K for the fiscal year ended 30 June 2026, filed 29 July 2026: Item 8 cash flows statements and income statements, Note 6 property and equipment, Note 13 leases, https://www.sec.gov/Archives/edgar/data/789019/000119312526323660/msft-20260630.htm ; Amazon.com, fourth quarter 2025 results, https://www.aboutamazon.com/news/company-news/amazon-earnings-q4-2025-report , and the free cash flow definition in its earnings release, Form 8-K Exhibit 99.1, https://www.sec.gov/Archives/edgar/data/1018724/000101872426000002/amzn-20251231xex991.htm ; SEC Division of Corporation Finance, Non-GAAP Financial Measures compliance and disclosure interpretations, Question 102.07, https://www.sec.gov/rules-regulations/staff-guidance/corporation-finance-interpretations/non-gaap-financial-measures ; Regulation G, 17 CFR 244.100, https://www.ecfr.gov/current/title-17/section-244.100 ; Regulation S-K Item 10(e), 17 CFR 229.10, https://www.ecfr.gov/current/title-17/section-229.10 ; free cash flow, growth rates and ratios computed by Kresmion from the 10-K figures ; Kresmion Financials tab, the KRM.FIN spreadsheet function and the relative value tool.

Kresmion Research.