Free cash flow is the cash a company generates after paying for capital expenditures. It's the money available for dividends, debt repayment, and growth investments.
A company generates $500M in operating cash flow and spends $200M on CapEx. FCF = $300M. This $300M is 'free' to distribute or reinvest.
Positive and growing FCF is a strong signal. It means the company can fund its own growth. Compare FCF yield (FCF/Market Cap) to bond yields — if higher, the stock may be undervalued.
In 2024, Apple generated approximately $110 billion in operating cash flow and spent about $10 billion on CapEx, yielding ~$100 billion in free cash flow. With a market cap of ~$3.4 trillion, that's an FCF yield of ~2.9% — not exciting until you consider Apple also buys back $90B+ in stock annually, effectively returning nearly all FCF to shareholders.
Contrast with Amazon, which generated ~$85B in operating cash flow but spent ~$50B on CapEx (data centers, warehouses), leaving ~$35B in FCF. Amazon's lower FCF isn't bad — it reflects aggressive reinvestment. This is why you must understand where FCF goes, not just the number.
| Company | FCF (2024 est.) | FCF Yield | What They Do With It |
|---|---|---|---|
| Apple (AAPL) | $100B | 2.9% | Buybacks + dividends |
| Alphabet (GOOG) | $70B | 3.5% | Buybacks + cash pile |
| Amazon (AMZN) | $35B | 1.7% | Reinvested in growth |
| Meta (META) | $50B | 4.8% | Buybacks + AI investment |
💡 Pro Tip: The "FCF Yield vs. 10-Year Treasury" comparison is one of the best valuation screens. When Meta's FCF yield hit 7% in late 2022 versus a 3.8% Treasury yield, the market was essentially saying Meta's cash flows were riskier than government bonds — clearly wrong for a $35B cash flow machine. That was a generational buy signal.
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Try Dividend Calculator →Can FCF be negative?
Yes, especially for growth companies investing heavily. Amazon had negative FCF for years while building infrastructure. Negative FCF isn't always bad — check if it's funding growth (good) or covering operating losses (bad). Mature companies should consistently generate positive FCF.
What's a good FCF yield?
FCF yield = FCF per share ÷ share price. A yield above 5% is attractive for mature companies; above 8% suggests potential undervaluation. Compare FCF yield to the 10-year Treasury yield — if FCF yield is lower, the stock may not compensate enough for the risk.
Why is FCF better than net income?
Net income includes non-cash items (depreciation, stock-based compensation) and can be manipulated through accounting choices. FCF strips all that out — it's actual cash the company generated. Warren Buffett famously focuses on "owner earnings" (essentially FCF) rather than reported earnings.