Free cash flow is the cash a company's operations produced in a period after paying for the buildings, machines, servers and other long-lived assets the business runs on. It comes from two lines of the cash flow statement, so it leans far less on accounting estimates than earnings do. US accounting rules (GAAP) do not define it, which means each company picks its own version and has to explain it. This entry gives the formula, works it from Amazon's annual report and shows how free cash flow yield turns it into a valuation ratio. For the wider basics of owning shares, start at the stocks hub.
How is free cash flow calculated?
Subtract capital expenditures, listed under investing activities, from net cash provided by operating activities; both figures come from the same cash flow statement.
The SEC's beginner guide to financial statements splits the statement of cash flows into operating, investing and financing activities. Operating cash flow is the subtotal that closes the first part. It starts from net income, adds back expenses that used no cash, such as depreciation and pay in stock, and adjusts for money tied up in or released from inventory, receivables and unpaid bills. Capital spending is usually the first line of the investing part. Companies label it "purchases of property and equipment," "payments for property, plant and equipment" or simply "capital expenditures," and print it in parentheses because the cash went out.
SEC staff guidance on non-GAAP measures (Question 102.07) accepts this calculation in filings but points out that free cash flow has no uniform definition and that its name does not say how it was worked out. A company that reports it must describe its method and reconcile the result to operating cash flow, the nearest GAAP figure, and it may not present free cash flow per share.
Worked example: Amazon's 2025 free cash flow, from its 10-K
Amazon's annual report for 2025, filed with the SEC on February 6, 2026, shows these lines in its statement of cash flows, in millions of dollars:
- Net cash provided by operating activities: $139,514
- Purchases of property and equipment: $131,819
- Free cash flow on the textbook formula: $139,514 − $131,819 = $7,695
- Proceeds from property and equipment sales and incentives: $3,499
- Free cash flow as Amazon defines it: $139,514 − ($131,819 − $3,499) = $11,194
- Net income: $77,670, so free cash flow was $11,194 ÷ $77,670 = 14.4% of profit
- Net sales: $716,924, a free cash flow margin of 1.6%
The two answers differ by $3.5 billion purely because of what each subtracts. Amazon reconciles its own figure to operating cash flow in a 10-K section headed Non-GAAP Financial Measures and warns there that free cash flow leaves out debt repayments and cash paid for acquisitions. How to read an earnings report shows where the same lines appear in quarterly results.
Why is free cash flow different from net income?
Net income spreads equipment costs over many years and counts some gains before cash arrives, while free cash flow records cash only when it moves.
Amazon's 2025 cash flow statement walks from one figure to the other:
| Line | $ millions | Why it moves the number |
|---|---|---|
| Net income | 77,670 | Accrual profit, the starting point |
| Depreciation and amortization | +65,756 | Charged against profit, but no cash left this year |
| Stock-based compensation | +19,467 | Employees were paid in shares, not cash |
| Non-operating income | −14,880 | Mostly gains on the Anthropic investment, not operating cash |
| Deferred income taxes | +11,470 | Tax expense booked but not yet paid |
| Working capital changes | −19,969 | Cash tied up in inventory, receivables and other items |
| Operating cash flow | 139,514 | Subtotal of the lines above |
| Purchases of property and equipment | −131,819 | Cash spent on data centers, warehouses and equipment |
| Free cash flow, textbook formula | 7,695 | What remained |
The widest gap sits between two numbers that both describe equipment. Profit absorbed $65.8 billion of depreciation on assets bought in earlier years, while $131.8 billion of cash went out for new ones, about twice as much. When a company expands this fast, free cash flow drops well below earnings; in a mature business with steady spending, depreciation and capital spending tend to converge and so do the two measures.
The gap kept widening. In its third-quarter release of October 29, 2026, Amazon reported $168.3 billion of operating cash flow for the 12 months to September 30, 2026, against $210.7 billion of property and equipment purchases net of proceeds, leaving free cash flow of −$42.4 billion. Net income over the same 12 months was $134.8 billion, lifted by $69.0 billion of non-operating income that the cash flow statement strips back out.
What is free cash flow yield?
Free cash flow yield is the last 12 months of free cash flow divided by market capitalization, expressed as a percentage.
Dividing free cash flow per share by the share price gives the same answer. Flipped over, the ratio becomes price to free cash flow, a multiple read much like the P/E ratio. Market capitalization is the share price times shares outstanding, as market cap explained sets out.
Worked example: FCF yield for a hypothetical packaging maker
- 300 million shares at $100 = $30.0 billion market value
- Operating cash flow over the last 12 months: $2.7 billion; capital spending: $1.2 billion
- Free cash flow: $2.7 billion − $1.2 billion = $1.5 billion, or $5.00 per share
- FCF yield: $1.5 billion ÷ $30.0 billion = 5.0%, a price-to-free-cash-flow multiple of 20
- Net income of $2.0 billion is $6.67 per share: a P/E of 15.0 and an earnings yield of 6.67%
- If capital spending rises to $1.8 billion, free cash flow falls to $0.9 billion and the yield to 3.0%, with the share price unchanged
The yield only makes sense when free cash flow is positive. At −$42.4 billion over the 12 months to September 30, 2026, Amazon's free cash flow yield was negative at any share price, while its earnings yield stayed positive. Index providers use the ratio too: from December 21, 2026, S&P Dow Jones Indices adds free cash flow to price as a fourth value factor in its US style indexes, leaving it out for real estate, banks, insurers and several other financial industries. Growth vs value investing covers that change.
Where do you see free cash flow?
You meet free cash flow in quarterly earnings releases, the non-GAAP section of annual reports, valuation models, dividend coverage checks and stock screening sites.
- Earnings releases. Amazon's quarterly releases report trailing 12-month free cash flow beside operating cash flow and net capital spending.
- Annual reports. The 10-K reconciles the company's figure to operating cash flow, as Regulation G and Item 10(e) of Regulation S-K require for any non-GAAP number.
- Valuation models. A discounted cash flow valuation projects free cash flow for future years and converts it to a value today; fundamental vs technical analysis works one through.
- Dividend checks. A dividend covered by free cash flow needs no borrowing to pay; dividend investing basics and the payout ratio entry explain the coverage test.
- Screeners and data sites. These often show free cash flow per share, which they calculate themselves, since companies may not present it that way in SEC filings. Quotes and charts for large US companies are on the stocks page.
How does free cash flow compare with similar measures?
Free cash flow is the only one of these measures that subtracts capital spending in cash, so it can sit far below the others.
| Measure | How it is built | Subtracts capital spending? | What it leaves out |
|---|---|---|---|
| Net income | Revenue minus all expenses, plus or minus gains and losses | No; it deducts depreciation instead | When cash actually moves; noncash gains count as profit |
| Earnings per share | Net income divided by average shares | No | The same gaps as net income |
| Operating cash flow | Net income converted to cash | No | The cost of keeping and adding assets |
| Free cash flow | Operating cash flow minus capital spending | Yes | Debt repayments, acquisitions and pay in stock |
| EBITDA | Earnings before interest, taxes, depreciation and amortization | No | Taxes, interest, working capital and capital spending |
What mistakes do people make with free cash flow?
The most common mistake is comparing two companies' free cash flow without checking that both subtract the same items from operating cash flow.
- Mixing definitions. Amazon nets asset-sale proceeds and incentives out of its capital spending, while other companies also subtract capitalized software or lease payments. Read each reconciliation before comparing.
- Missing assets bought on credit. Equipment acquired under finance leases never passes through the capital spending line. Amazon added $2.9 billion of property this way in 2025 and pays for it over time through the financing section.
- Treating it as spare cash. The SEC staff cautions against implying that free cash flow is available for discretionary spending, since mandatory debt payments are not deducted from it.
- Ignoring pay in stock. Because operating cash flow adds back stock-based compensation, free cash flow treats it as costless. Amazon's came to $19.5 billion in 2025, and paying staff in shares dilutes existing owners.
- Judging one quarter. Capital spending is lumpy and working capital swings with the seasons, so trailing 12-month or multiyear totals give a steadier picture.
- Reading every negative figure as distress. Free cash flow turns negative both when a profitable company invests heavily and when the operations themselves burn cash. Check whether operating cash flow is growing; Amazon's rose 29% in the 12 months to September 30, 2026.