Apple's profit rose while its free cash flow fell

Free cash flow is a number you build, not one you look up

Every other figure an investor leans on has an official home. Net income sits at the bottom of the income statement, its meaning fixed by accounting rules. Free cash flow has no such home. It never appears as a line in a company's financial statements, because no rule requires it and no rule defines it. The United States Securities and Exchange Commission, which polices what public companies may report, says so plainly: free cash flow "does not have a uniform definition and its title does not describe how it is calculated."¹ It is a measure companies construct and disclose voluntarily, outside the official accounting rules, which is what the SEC means by calling it a non-GAAP measure.¹

So the first thing to know about free cash flow is that you build it. The most common construction, and the one the SEC describes, starts from a figure the rules do define, cash generated by operating activities, and subtracts the cash the company spent on long-lived assets.¹ The result is meant to answer a question net income cannot. After a business collects its cash and pays for the equipment, buildings, and other assets it needs to keep running, how much cash is actually left for the people who funded it, its lenders and its shareholders?

That question matters because profit and cash are not the same thing. An earlier lesson in this course showed how a business can report a healthy profit and still run short of cash, because accounting profit records a sale when it is made, not when the money arrives. Free cash flow ignores that timing and counts only cash that has actually moved. It is the cash a business could hand to its investors this year without borrowing or selling assets to do it.

Building Apple's number, line by line

The cash-flow statement is where the raw material lives. Every company that reports under the international or the US accounting rules sorts its cash into three groups.² Operating activities are the cash the core business throws off. Investing activities are cash spent on or raised from long-term assets. Financing activities are cash moving to and from lenders and shareholders. Free cash flow is built from the first two.

Take Apple's most recent filing, its Form 10-K for the fiscal year that ended September 27, 2025, filed with the SEC on October 31, 2025.³ Its statement of cash flows begins with net income of $112,010 million and works toward a cash figure by reversing the parts of profit that never involved cash.⁴ (Every figure here is in millions of US dollars, read from that statement.) The two largest reversals are non-cash charges. Depreciation and amortization of $11,698 million is the accounting cost of assets wearing out over the year, which lowered profit but moved no cash.⁴ Share-based compensation of $12,863 million is the value of stock granted to employees, a genuine cost to existing shareholders that again moved no cash.⁴ Both get added back. The statement then adjusts for changes in working capital, the cash tied up in unpaid customer bills, inventory, and unpaid supplier bills as those rise and fall across the year. In fiscal 2025 the working-capital changes and a small remainder together subtracted about $25 billion.⁴ After all of it, Apple's cash generated by operating activities was $111,482 million.⁴

That operating figure is the starting point. From it, subtract what the company spent to acquire long-lived assets. In the investing section Apple reports "Payments for acquisition of property, plant and equipment" of $12,715 million, its capital expenditure, or capex, the cash it laid out for things like manufacturing equipment and facilities.⁴ Operating cash of $111,482 million less capex of $12,715 million leaves free cash flow of $98,767 million.

One honest caveat sits in that capex line. The filing reports a single capex number. It does not tell you how much was spent merely to keep the existing business running versus how much went to expand it. If you want to separate the maintenance capex a business cannot avoid from the growth capex it chooses, you have to estimate the split yourself. The statement will not do it for you.⁴

Why Apple's profit rose while its cash fell

A year earlier, in fiscal 2024, Apple's operating cash was higher, at $118,254 million, and its capex was lower, at $9,447 million, so its free cash flow was $108,807 million.⁴ Between the two years free cash flow fell about 9 percent, from roughly $108.8 billion to $98.8 billion. Over the same two years net income went the other way, rising from $93,736 million to $112,010 million, an increase of about 19 percent.⁴ Profit up by nearly a fifth, free cash flow down by nearly a tenth: the same company, the same two years, two numbers pointing in opposite directions.

Neither number is wrong. They measure different things. Net income rose because the business earned more. Free cash flow fell for two reasons the statement shows. Capex climbed by about $3.3 billion as Apple spent more on long-lived assets. And operating cash fell even though profit rose, because working capital swung hard. The single line "other current and non-current liabilities" moved from adding about $15.6 billion to operating cash in 2024 to subtracting about $11.1 billion in 2025, a swing near $27 billion.⁴ Working capital is lumpy. A company that pays down a large bill it had been carrying, or builds inventory ahead of a product launch, ties up cash that year and frees it the next, and none of that touches reported profit.

That is why a single year of free cash flow is a weak verdict on a business. The year-to-year fall says nothing about whether Apple's business weakened, and it did not. It records a heavier year of investment and an ordinary swing in working capital. Read free cash flow across several years, and against the lines that moved it.

Which free cash flow are you being handed

Because free cash flow has no fixed definition, the phrase can name more than one number, and the versions do not agree. The one built above, operating cash minus capex, is the construction the SEC describes, and it is the most common.¹ It is not the only one a careful analyst uses.

Aswath Damodaran, a finance professor at NYU whose definitions are standard across the field, builds free cash flow from a different starting line. His free cash flow to the firm, or FCFF, begins not with reported operating cash but with after-tax operating income, and subtracts reinvestment, defined as capital expenditure minus depreciation plus the change in non-cash working capital.⁵ His free cash flow to equity, or FCFE, starts from net income and subtracts both reinvestment and the net cash paid to lenders.⁵ The two answer different questions. FCFF is the cash available to everyone who funded the business, lenders and shareholders together, before any debt is served. FCFE is what is left for shareholders alone, after the lenders are paid. A company repaying debt can report a positive FCFF and a negative FCFE in the very same year.⁵

These constructions can diverge sharply even on Apple's own numbers. The SEC's operating-cash-minus-capex version keeps every non-cash add-back that sits inside operating cash, including that $12,863 million of share-based compensation. Damodaran's FCFF adds back only depreciation, not stock compensation, so it treats that cost very differently.⁶ Capex of $12,715 million minus depreciation of $11,698 million is just $1,017 million.⁴ Gross capex looks large, but net of the assets wearing out Apple added only about a billion dollars of fixed assets, a different picture of the same company than the headline capex figure gives.

So before you compare one company's free cash flow to another's, or to its own past, you have to know which number you are holding, and confirm it was built the same way each time. The label alone will not tell you.