Capital spending, free cash flow and payouts: how Apple and Microsoft use their cash
Every dollar of cash a company earns from operations has three possible uses: spend it on the business, hand it back to the owners, or keep it. Apple and Microsoft each generated more than $100 billion from operations in fiscal 2025 and made opposite choices. This lesson sets the two side by side, and uses a calculator to see how long each pattern could last if repeated.
- Level
- Beginner
- Reading time
- About 20 minutes
- Know this first
- Operating margin and cost structure
By the end you will be able to:
- divide a company's cash from operations among capital spending, payouts and what is kept
- read capital spending against depreciation and against revenue
- test whether a payout above free cash flow can continue, and for how long
- compare the capital allocation of two companies without ranking them
Three things a company can do with its cash
Once a company has collected cash from its customers and paid its operating costs, what remains has three possible uses. It can spend it on the business, by buying equipment, buildings and technology that will produce more cash later. It can return it to the owners, as dividends and share buybacks. Or it can keep it, adding to its cash and investments or paying down debt. Deciding the split is called capital allocation, and it is among the most important choices a management makes, because the cash can only be used once.
The lesson on free cash flow defined what is left after capital spending, and the lesson on dividends, buybacks and payout looked at what companies hand back. This lesson puts the two together for a pair of companies and asks a further question: if a company kept to the same pattern, how long could it last?
The same cash, two decisions
Apple and Microsoft each generated well over $100 billion from operations in fiscal 2025, and left themselves $98.8 billion of free cash flow at Apple after $12.7 billion of capital spending, and $71.6 billion at Microsoft after $64.6 billion. The table follows each company's cash from the top to the bottom.
| Fiscal 2025, $ billion | Apple | Microsoft |
|---|---|---|
| Cash from operations | 111.5 | 136.2 |
| Capital spending | 12.7 | 64.6 |
| Free cash flow | 98.8 | 71.6 |
| Dividends and buybacks | 106.1 | 42.5 |
| Cash left after both, or (shortfall) | (7.4) | 29.1 |
| Capital spending, % of cash from operations | 11.4% | 47.4% |
| Capital spending, times depreciation and amortisation | 1.09× | 1.89× |
| Net cash at year end (cash and investments less borrowings) | 33.8 | 51.4 |
Apple spent 11.4% of its cash from operations on capital spending and Microsoft spent 47.4%. Apple then returned $106.1 billion, 107.5% of its free cash flow, which is more than it generated, so it ended the year $7.4 billion short on this simple measure. Microsoft returned $42.5 billion, 59.4% of its free cash flow, and was left with $29.1 billion. The two are opposites: one gave back more than its free cash flow and spent little on the business, and the other gave back less than half of its cash from operations and spent heavily on the business.
The shortfall at Apple is not a sign of trouble in itself. It had $33.8 billion of net cash at the year end, meaning cash and investments larger than its borrowings by that amount, and a company can return more than it earns in a year when it holds a surplus it has chosen to run down. The table counts only cash from operations, capital spending and the two kinds of payout. The full cash flow statement has other items, such as the purchase and sale of investments and the issue and repayment of debt, which this lesson leaves out for clarity.
Capital spending against depreciation
One way to read capital spending is to set it beside the depreciation and amortisation charged in the same year. Depreciation is the part of earlier spending that the income statement is treating as used up. Capital spending equal to depreciation roughly replaces what wore out, and capital spending well above it adds to the stock of assets.
Apple spent 1.09 times its depreciation, so its capital spending was little more than the replacement of what it used. Microsoft spent 1.89 times its depreciation, which points to a business adding capacity faster than it is wearing it out. Over the year Microsoft's capital spending rose 45.1%, from $44.5 billion to $64.6 billion, and Apple's rose 34.6%, from $9.4 billion to $12.7 billion. Microsoft's depreciation and amortisation charge rose 53.2% over the same year, and Apple's rose 2.2%. As the assets Microsoft is buying come into use, a rising depreciation charge is the way those costs reach the income statement, which other things being equal lowers the margin discussed in the previous lesson.
As a share of revenue, capital spending was 3.1% at Apple and 22.9% at Microsoft. The filings used here do not say what the money was spent on in a way that this lesson can rely on, and it does not offer an explanation. What the numbers show is a difference in how much of each dollar of sales goes back into the business.
Repeat the pattern and watch the net cash
The calculator takes each company's fiscal 2025 cash from operations and lets the capital spending and the payout change. It then repeats the same year again and again, up to ten, and follows the net cash, which starts at $33.8 billion for Apple and $51.4 billion for Microsoft. Each side shows free cash flow, the payout as a share of it, the cash kept or drawn down in a year, the net cash after the chosen number of years, and, when cash is being drawn down, how many years until the net cash is gone. The sliders start at the real figures rounded to a tenth of a billion, so the first answer for Apple is a shortfall of $7.3 billion where the filed figures give $7.4 billion. Real cash from operations does not stay the same from year to year, so this is an exercise in arithmetic and not a forecast.
Free cash flow is $98.8 billion at Apple and $71.6 billion at Microsoft. At this pace Apple draws down $7.3 billion a year, leaving net cash of $26.4 billion after 1 year, and its net cash is gone in 4.6 years, while Microsoft adds $29.1 billion a year, reaching net cash of $80.5 billion after 1 year.
Four experiments. First, at the starting settings Apple draws down $7.3 billion a year and its net cash would last 4.6 years, while Microsoft adds $29.1 billion a year. Second, move the pattern out to five years: Apple's $26.4 billion of net cash after one year has become net debt of $2.8 billion, and Microsoft's has grown to $196.7 billion. Third, cut Apple's payout to $98.0 billion, just under its free cash flow, and it keeps $0.8 billion a year, so the years-until-gone figure goes to n/a. Fourth, take Microsoft's capital spending down to $44.5 billion, last year's level, and its yearly surplus rises to $49.2 billion. Then raise it to $90 billion and free cash flow falls to $46.2 billion, leaving just $3.7 billion after the payout. Capital spending and payouts compete for the same cash.
Reading the result
A payout above free cash flow can go on for as long as the surplus lasts, and the calculator shows how long that is at the current pace. It does not follow that the company must change course when the surplus runs out. A business can borrow, as long as lenders are willing and the interest is affordable, and cash from operations can grow, which would shift the whole picture. What the arithmetic does give is a way of asking the right question: what has to change for the pattern to continue? The answer might be higher cash from operations, lower payouts, new borrowing, or the sale of investments, and each has its own cost.
The Microsoft side of the calculator asks the reverse question. A company that keeps more cash than it returns builds a surplus, and a surplus has to be put to use. It might fund more capital spending, acquisitions, higher payouts or simply sit as cash. Nothing forces the choice, which is why an observer should watch what a company does with its surplus over several years and not draw conclusions from one.
What this view cannot tell you
- One year is not a policy. A single year of capital spending or buybacks can be unusually high or low. The pattern is clearer over several years.
- Cash from operations changes. The calculator repeats fiscal 2025 for every year, which is an assumption and not a forecast.
- The cash flow statement has more lines. Investments bought and sold, debt issued and repaid, acquisitions and the cash tax paid on share awards all move the net cash too.
- Net cash is a rough measure. It sets cash and investments against borrowings and leaves out leases and other obligations.
- Capital spending is not all alike. Money spent to replace worn assets, to expand capacity and to start something new have different risks, and the cash flow statement does not separate them.
Common mistakes
Treating a payout above free cash flow as a warning by itself
It depends on where the extra cash came from. Funding it from a large surplus is a choice. Funding it from new borrowing every year is a different matter.
Treating low capital spending as a sign of good management
It may reflect a business that needs little, or one that is under-investing. The cash flow statement cannot say which.
Treating high capital spending as growth
Spending is an input, not a result. Whether it earns a return is shown later in revenue and profit.
Ignoring depreciation
Heavy spending today becomes a heavy charge in later income statements. A margin comparison across companies at different stages of investment should keep this in mind.
Comparing the payout with net income only
Net income includes non-cash items. Free cash flow is the more direct measure of what is available.
Try it yourself
1. A company has cash from operations of $90 million, capital spending of $30 million and payouts of $40 million. How much does it keep, and what share of its free cash flow does it return?
Show the working
Free cash flow is 90 − 30 = $60 million. It keeps 60 − 40 = $20 million and returns 40 ÷ 60 = 66.7% of its free cash flow.
2. A company spends $200 million on capital equipment in a year when its depreciation is $50 million. What does the ratio suggest?
Show the working
200 ÷ 50 = 4 times. It is adding to its assets far faster than it is using them up, which points to a business that is expanding or starting something new, and which will carry a higher depreciation charge in later years.
3. A company has net cash of $1,000 million and pays out $150 million more than its free cash flow each year. What is its net cash after three years, and when does it run out?
Show the working
After three years it has 1,000 − 3 × 150 = $550 million. It runs out when 1,000 ÷ 150 = 6.7 years have passed, if nothing else changes.
4. Why does a company's decision to spend more on capital equipment reduce what it can return to owners in the same year?
Show the working
Both come out of the same free cash flow. Unless the company draws down cash or borrows, every dollar spent on equipment is a dollar that cannot be paid out.
Where this is used
- A board sets a rule for how cash is split among investment, dividends, buybacks and debt repayment.
- An analyst compares capital spending with depreciation to judge whether a company is expanding or maintaining.
- A lender tests whether a borrower's payouts are covered by free cash flow.
- An investor looks at several years of capital allocation to see what a management actually does with surplus cash.
Key terms
- Capital allocation
- The choice of how to divide cash among investment, payouts and reserves.
- Capital spending
- Cash spent on property, equipment and other long-lived assets.
- Free cash flow
- Cash from operations less capital spending.
- Payout
- Dividends and share buybacks together.
- Net cash
- Cash and investments less borrowings. A negative figure is net debt.
- Replacement versus expansion
- Spending that keeps assets at their present level against spending that adds to them.
Questions people ask
Is it better to return cash or to reinvest it?
It depends on what the reinvestment earns. Cash is best kept in the business when it can earn more there than the owners could earn elsewhere, and returned when it cannot. The lesson on the cost of capital explains the yardstick.
Why do companies buy back shares instead of paying dividends?
A buyback can be adjusted from year to year, where a dividend is usually kept steady, and the two are taxed differently in many places. The payout lesson sets out the effects on earnings per share.
Does a company need net cash?
No. Many sound companies run with net debt. Net cash is a cushion, and how much cushion is wanted depends on how steady the business is.
Why compare only two companies?
Two companies of similar size reporting in the same currency under the same rules make differences easier to see and to trust. Adding more usually means adding differences in accounting and currency that need their own explanation.
Sources and review
- Apple Inc., Form 8-K, Exhibit 99.1: fourth quarter and full-year fiscal 2025 results, filed with the US Securities and Exchange Commission. Source of Apple's statements.
- Microsoft Corporation, Form 8-K, Exhibit 99.1: fourth quarter and fiscal year 2025 results, filed with the US Securities and Exchange Commission. Source of Microsoft's statements.
How the numbers were checked: cash from operations, capital spending, depreciation, dividends and buybacks were taken from the filed cash flow statements, and net cash was rebuilt from the balance sheets. Every ratio and every change in the lesson was recomputed in plain code, and the calculator, which runs separately, was compared with that code across a grid of inputs.