Free Cash Flow Explained With Apple and Microsoft

Microsoft earned $133.75 billion in fiscal 2026, a 40.3% net margin. It kept $66.99 billion as free cash flow. So about half of the reported profit never turned into spare cash.

That isn't an accounting scandal. It's the whole reason free cash flow exists. Net income tells you what a company earned under accounting rules. Free cash flow tells you what's left after the business pays to keep itself running and growing.

What is free cash flow?

Free cash flow is operating cash flow minus capital expenditures. Operating cash flow is the cash the core business brings in. Capex is what it spends on buildings, equipment and other long-lived assets. Take Apple: in fiscal 2025, $111.48 billion minus $12.71 billion left $98.77 billion of free cash flow.

Both lines are on the cash flow statement, with capex usually shown as a negative number. Our longer primer on why investors trust free cash flow goes deeper on the theory. Whatever's left is what management can spend on buybacks, dividends, acquisitions or paying down debt.

Apple spent all of it and then some. In fiscal 2025 it bought back $90.71 billion of stock and paid $15.42 billion in dividends, a combined $106.13 billion. Cash and short-term investments fell from $65.17 billion to $54.70 billion over the year.

Why can free cash flow differ from net income?

Net income uses accrual accounting. It spreads the cost of big assets over many years through depreciation, and it books revenue when it's earned, not when cash arrives. Free cash flow counts cash when it moves. So a company spending heavily on assets, like Microsoft with $115.95 billion of capex in fiscal 2026, can post strong earnings and much weaker free cash flow.

Here's how the two line up. Apple's fiscal 2025 ended September 27, 2025, and Microsoft's fiscal 2026 ended June 30, 2026.

Apple: cash that tracks earnings

Apple's free cash flow came to about 88% of net income in fiscal 2025. In fiscal 2022 it ran ahead, with $111.44 billion of free cash flow against $99.80 billion of net income. Capex has stayed between $9.45 billion and $12.71 billion a year since fiscal 2021, so earnings and cash roughly agree.

Microsoft: building ahead of the cash

Now look at Microsoft's capex year by year: $23.89 billion in fiscal 2022, $28.11 billion, $44.48 billion, $64.55 billion, then $115.95 billion in fiscal 2026. That's nearly five times the fiscal 2022 level, and in the latest year it ate about 63% of operating cash flow.

Net income grew 31.3% in fiscal 2026, while free cash flow slipped from $71.61 billion to $66.99 billion, a drop of about 6.5%. Watch how the free cash flow line flattens below even as the business keeps growing.

Is that bad? Not automatically. Heavy capex is a bet that those assets produce cash later, and revenue grew 17.8% in fiscal 2026. The thesis holds if cash generation catches up with the spending. It weakens if capex keeps climbing faster than operating cash flow. Our plain-English income statement guide shows where depreciation sits.

How do you read FCF margin?

FCF margin is free cash flow divided by revenue. It tells you how much spare cash each dollar of sales produces. Apple's was 23.7% in fiscal 2025 and Microsoft's was 20.2% in fiscal 2026, so Apple kept about 24 cents of every sales dollar as free cash and Microsoft about 20 cents.

The trend matters more than the level. Apple's FCF margin has moved between 23.7% and 28.3% from fiscal 2021 to fiscal 2025. Fairly steady. Microsoft's went from 32.9% to 20.2% over four years, a clear shift.

The gap to net margin is the tell. Apple's 26.9% net margin and 23.7% FCF margin sit close together. Microsoft's 40.3% against 20.2% is a 20-point spread, and that's worth explaining before you trust the earnings multiple. Notice how different business models land in different ranges here.

You don't have to calculate any of this by hand. A free Stock Audit pulls cash flow, margins and valuation for a ticker in one place, for example the Apple Stock Audit.

What does FCF yield tell you about the price?

FCF yield is trailing twelve months of free cash flow divided by market value. It shows how much cash the business throws off relative to what you pay. As of the close on Wednesday, October 14, 2026, Apple's FCF yield was 2.7% on a $5.01 trillion market cap, and Microsoft's was 1.7% on $3.96 trillion.

Flip the yield over and you get a price-to-free-cash-flow multiple: about 37 times for Apple, about 59 times for Microsoft.

That's where it gets interesting. On earnings, the ranking reverses: Apple's trailing P/E was 39.2x and Microsoft's 30.1x. Microsoft looks cheaper on earnings and pricier on cash, and the whole difference is capex. If you only use the P/E ratio, you'd never see it.

A low FCF yield isn't a verdict either. Analysts' forward EPS estimate for Microsoft is $23.67 against trailing EPS of $17.75, so the market is pricing in growth. FCF yield tells you how much of the price depends on that growth showing up.

What are the common free cash flow traps?

The biggest trap is reading one year in isolation. Apple's free cash flow went from $111.44 billion in fiscal 2022 to $99.58 billion, back up to $108.81 billion, then down to $98.77 billion in fiscal 2025. None of those swings changed what the business is.

Not all capex is the same

The cash flow statement doesn't split capex into spending that maintains the business and spending that grows it. Growth capex can be a great use of cash. Maintenance capex is a permanent cost. You often have to judge from the trend and whether revenue follows.

Operating cash flow can get a temporary lift

Collecting from customers faster or paying suppliers slower can pump up operating cash flow for a year without the business improving. If free cash flow jumps while revenue and margins don't, check working capital.

Payouts larger than free cash flow

Microsoft returned $48.72 billion in fiscal 2026 out of $66.99 billion of free cash flow, leaving room. Apple returned more than it generated in fiscal 2025, which works for a while from the balance sheet but can't run forever.

How do you use free cash flow when you research a stock?

Start with five years of operating cash flow, capex and free cash flow, then compare each year to net income and revenue. Apple and Microsoft show both ends: free cash flow at about 88% of earnings at Apple in fiscal 2025, about half at Microsoft in fiscal 2026. Then put the FCF yield next to the P/E.

• Pull at least five years of the cash flow statement, not one.

• Divide free cash flow by net income each year. If it's well below earnings, find out why (usually capex).

• Track FCF margin over time and compare it with net margin.

• Check FCF yield alongside P/E. If they disagree, capex is often the reason.

• Add buybacks and dividends and compare the total to free cash flow.

Microsoft's next report is scheduled for Wednesday, October 28, 2026, and Apple's for Monday, November 2, 2026, per the Yahoo Finance earnings calendar (dates may be estimates until confirmed). For Microsoft, capex against operating cash flow is the test of everything above. The 30-Minute Stock Audit guide and our article on the 30-minute stock audit framework show where cash flow fits.

Frequently Asked Questions

Is negative free cash flow always a bad sign?

No. A young company or one in a heavy build phase can burn cash on purpose because it's investing ahead of demand. What matters is whether the spending eventually produces revenue and operating cash flow that cover it. Negative free cash flow becomes a problem when it persists, funding depends on new debt or share issuance, and revenue growth isn't following the spending.

How is free cash flow different from EBITDA?

EBITDA is earnings before interest, taxes, depreciation and amortization, so it ignores capital spending entirely. Free cash flow subtracts it. That's why EBITDA can flatter capex-heavy companies. As of the close on Wednesday, October 14, 2026, Microsoft traded at 19.2x EV/EBITDA versus Apple's 30.0x, which makes Microsoft look far cheaper than its 1.7% FCF yield suggests.

Where do I find free cash flow in a company's filings?

Most companies don't report free cash flow as an official line, so you calculate it from the cash flow statement in the annual or quarterly report. Take "net cash from operating activities" and subtract the capital spending line, often labeled "purchases of property and equipment." Some data providers calculate it slightly differently, so check which definition you're using.

Why does Apple carry net debt if it generates so much cash?

Because it returns more than it keeps. At the end of fiscal 2025, Apple had $54.70 billion of cash and short-term investments against $112.38 billion of total debt, net debt of $57.68 billion. Big buybacks year after year explain much of that. High free cash flow lets a company carry that debt comfortably, but it's still worth tracking.

How does FCF yield compare to dividend yield?

Dividend yield only counts cash actually paid out as dividends, while FCF yield counts all the free cash the business generates. Apple's dividend yield was 0.32% against a 2.7% FCF yield, and Microsoft's was 0.72% against 1.7%. The difference is cash used for buybacks, debt or reinvestment, so FCF yield gives a fuller view of what you're paying for.