Lesson 2.3 · 3 of 5 · How to read financial statements
Cash flow statement explained: operating cash, capex and FCF
A cash flow statement shows the money that actually came into and left a company over a year, in three parts: operations, investing and financing. Free cash flow is operating cash flow minus spending on buildings and equipment: the money left over for dividends, buybacks or paying down debt.
Terms in this lesson
- Cash flow statement
- The money that actually came into and went out of the bank account over a period.
- Free cash flow (FCF)
- The cash left to the company after it pays for its investments.
- Cash conversion
- How much of the accounting profit actually lands in the bank as cash.
Cash flow from operating activities
Definition
What is operating cash flow?
The cash actually collected from sales, minus the cash paid out for costs, wages and tax.
The statement starts from net income and adjusts it. It adds back costs that take no cash out that year, such as depreciation on equipment bought long ago. Then it accounts for cash tied up or released: customers who have not paid yet, inventory, bills owed to suppliers. US filings call the line “cash generated by operating activities”.
Apple, financial year ended 27 September 2025.
Cash brought in by selling phones, computers and services, after all day-to-day payments.
Positive because Apple collected more from securities it sold or that matured than it spent on new ones. It spent $12.7bn on property and equipment.
Mostly share buybacks ($90.7bn) and dividends ($15.4bn).
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Create a free accountCapital expenditure (capex): spending on buildings and equipment
Definition
What is capex?
Money spent on buildings, equipment and data centres that will be used for several years.
Capex is short for capital expenditure. It sits in the investing section, under names such as “payments for acquisition of property, plant and equipment” (Apple) or “additions to property and equipment” (Microsoft). The same section also holds purchases and sales of securities and acquisitions of companies, but those are not capex. Note that Microsoft also takes on data centres through finance leases, which are not in this line, so its total investment is higher than the chart shows.
Microsoft’s capex for financial years 2021 to 2026, ending 30 June, in billions of dollars: 20.6, 23.9, 28.1, 44.5, 64.6 and 115.9.
Free cash flow: how to calculate it
Definition
What is free cash flow?
FCF = operating cash flow - capex.
Free cash flow is the cash left once the company has paid its costs and its investment. It can use it to pay dividends, buy back shares or repay debt. It is not a line in the official accounts: analysts or the company work it out, and definitions vary slightly, for example on leases. Always check how it has been calculated.
Real case
Microsoft, financial year ended 30 June 2026
Operating cash flow rose by 34%, but spending on property and equipment rose by 80%, so free cash flow fell from $71.6bn to $67.0bn. The analysis page shows the same figures over several years.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: Apple, 10-K annual report for the financial year ended 27 September 2025 (operating cash flow $111,482m, capex $12,715m, investing cash flow $15,195m, financing cash flow -$120,686m, buybacks $90,711m, dividends $15,421m); Microsoft, 10-K annual reports for financial years 2021-2026 (the year ends on 30 June): capex; for 2026, operating cash flow $182,935m, capex $115,948m, net income $133,749m; for 2025, operating cash flow $136,162m, capex $64,551m.