I am trying to calculate free cash flow and conduct DCF analysis. How do you calculate the net investment as per DCF Analysis: Forecasting Free Cash Flows | Investopedia for Microsoft in 2012? The article states that you can calculate net investment by taking capital expenditure, disclosed in a company's statement of cash flows, and subtracting non-cash depreciation charges, found on the income statement.

Should I take the "Net cash used in investing" in MSFT's 2012's cash flow statements and deduct "Depreciation, amortization, and other noncash items" (which is also found in the cash flow statement instead of the income statement) from it? This will give me a positive value.

Or do I take the Cap Spending ("Additions to property and equipment" in the cash flow statement) and deduct "Depreciation, amortization, and other noncash items" from it? (which is suggested by the article.) However, doing so will give me a negative value, which doesn't make sense at all.

Additional question that I have, based on the formula listed on investopedia, I can't get the free cash flow figures on Morningstar. It seems MorningStar did not use the "net cash use in investing" but merely use the Cap Exp figures. Is that correct or is the formula for DCF on investopedia wrong?

  • No; both are correct. Net cash used in investing does not equal capex. Net cash used in investing - "This line item contains the sum total of the changes that a company experienced during a designated reporting period in investment gains or losses, as well as from any new investments in or sales of fixed assets." – Ross Sep 8 '15 at 15:07

There are many different ways to skin a cat. You could have several different people calculate FCF and have several different answers.

Morningstar uses this formula:

Free Cash Flow

Equal to operating cash flow minus capital spending.


Please Note: Having a negative value does not mean you did the formula wrong. Not all companies have a positive FCF.

BONUS: This might help clear some things up with calculations (or confuse you more).

Net CapEx PDF from NYE.EDU


My understanding is that you should be taking Net Cash Used in Investment. Here you are interested in how much the firm is increasing its production capacity, i.e. firm's ability to generate cash in the future, compared to maintaining that capacity (depreciation and amortization). And in financial statements this is CFI - Cash Flow from Investment or Net Cash Used in Investment.

At the same time you shouldn't be startled if Net Cash Used in Investment < Depreciation and Amortization. What is happening in this case is that a firm is reducing its production capacity, i.e. Investment in New Activities < Cost of Maintaining Current Activities.

  • Hi, edited my question abit. Can you help to shed some light on my second part of the post? – Laughy Aug 9 '15 at 15:39
  • No you don't want to use net cash used in investment as you don't want investments included (gains or losses) or from sales of fixed assets. – Ross Sep 8 '15 at 15:40

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