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To Free or Not to Free (Cash Flow) CONSILIENT OBSERVER | September 17, 2026

The question, “Do you want a company’s free cash flow to be Michael J. Mauboussin positive, negative, or neutral?” often sparks lively debate among finance professionals. Dan Callahan, CFA Free cash flow has become a central focus for investors evaluating many of the largest technology companies. Most notable among them are the “hyperscalers,” firms that operate large networks of data centers. These companies have dramatically grown capital expenditures to meet surging demand for computing power driven by generative artificial intelligence (GenAI). This has put significant pressure on free cash flow. You may have an answer to the question of free cash flow. The proper response is, “It depends.” Let’s take a step back. The value of a business is the present value of future free cash flow. Free cash flow (FCF), in standard finance, is net operating profit after taxes (NOPAT) minus investment in future growth. The main component of organic tangible investment is capital expenditures.1 FCF is the cash that a company can return to its capital providers. It stands to reason that, ultimately, you want FCF to be positive and plentiful. But here is why it depends: If a company can make an investment that earns a return in excess of the opportunity cost of capital, an estimate of the return that investors require, then future FCFs more than make up for the investment cost, and the value of the business goes up.2 In other words, a company with opportunities that promise sufficient returns should invest in all of them because those investments create value. The financial results of Walmart (previously Wal-Mart Stores) from 1973 to 1986 are a good illustration of the point. Walmart had negative FCF for each of those 14 years, but its annual return on invested capital (ROIC) averaged 18 percent, well above its cost of capital (see exhibit 1).

Exhibit 1: Walmart Free Cash Flow and Return on Invested Capital, 1973–

Return on Invested Capital (Percent) 200 (Right Axis) 20

Free Cash Flow ($ Millions) 100 10

Free Cash Flow -100 (Left Axis) -10

Source: Counterpoint Global, Walmart, and FactSet.

Walmart created value by investing more than it earned. That paid off, as the stock produced an annual total shareholder return of 33 percent during that period, three times that of the S&P 500, an index that tracks the stocks of 500 large companies in the U.S.

This report addresses five topics. First, we provide a working definition of FCF and examine where some leading technology companies stand today using results and consensus forecasts.

Second, we examine whether the acceleration of investment spending changes each company’s position within the life cycle.

Third, we calculate return on incremental invested capital (ROIIC). This figure attempts to assess the return on the marginal dollar invested in the business. When invested capital grows, a company that has an ROIIC above its current ROIC will see its ROIC rise. One that has an ROIIC below ROIC will see its ROIC fall.

ROIC, considered in tandem with growth, helps explain valuation. Specifically, the spread between ROIC and the cost of capital is positively correlated to the ratio of enterprise value to invested capital, and that correlation tends to rise further when growth is also considered. Moreover, changes in ROIC are positively associated with total shareholder returns.3

Fourth, we look at the relationship between free cash flow and ROIC, similar to what we show for Walmart in exhibit 1.

Finally, we look at how consensus estimates have changed for key value drivers, including sales, earnings before interest and taxes (EBIT), EBIT margins (EBIT ÷ sales), and capital expenditures. This provides some sense of what determines ROIIC.

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