{"id":586,"date":"2026-05-20T09:04:30","date_gmt":"2026-05-20T09:04:30","guid":{"rendered":"https:\/\/durhammovinghub.com\/?p=586"},"modified":"2026-05-20T09:04:30","modified_gmt":"2026-05-20T09:04:30","slug":"schwab-says-free-cash-flow-is-the-metric-every-investor-should-watch","status":"publish","type":"post","link":"https:\/\/durhammovinghub.com\/?p=586","title":{"rendered":"Schwab says free cash flow is the metric every investor should watch"},"content":{"rendered":"

Every earnings season, investors zero in on two familiar numbers: earnings per share<\/a> and revenue, often ignoring everything else on the report. Those headline figures grab attention on financial networks and across social media, but they can paint an incomplete and sometimes misleading picture of a company.<\/p>\n

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A new report from Charles Schwab<\/a>, published on May 12, 2026, argues that one overlooked metric tells investors far more about a company’s true financial health. That metric is free cash flow<\/a>, and Schwab says ignoring it means missing warning signs that earnings alone cannot reveal, even to the most attentive portfolio holders.<\/p>\n

“Investors often fixate on earnings, but they should consider evaluating free cash flow as well,” Michael Rawson, analyst at the Schwab Center for Financial Research (SCFR)<\/a>, explained.<\/p>\n

“Free cash flow is where the rubber hits the road when it comes to company financial performance,” Rawson added in the report.<\/p>\n

Free cash flow is the cash remaining after a company collects its quarterly revenue, pays operating expenses, and covers the cost of maintaining its capital assets. Earnings, by contrast, rely on accrual-based accounting, meaning revenue gets recognized when goods ship rather than when actual cash arrives in a company’s bank accounts.<\/p>\n

A company might also spread a large capital expenditure across multiple reporting periods, making one quarter’s earnings appear healthier than the underlying cash position truly warrants. <\/p>\n

Share buybacks create another distortion because a company’s EPS can rise by 10% simply by reducing the number of outstanding shares, without any real improvement in business operations.<\/p>\n

Free cash flow also serves as an early warning system when measured over multiple quarters, giving investors a chance to spot deterioration before it hits headline earnings. A company may post positive free cash flow in one quarter, but a declining trend over time could signal core business weakness that eventually leads to lower earnings and revenue. <\/p>\n

The electricity component of the CPI has risen steadily since 2021\u2026 and that can eventually feed into costs and margins.<\/p>\n

S&P 500<\/a> companies in the top 20% of free cash flow yield<\/a> between 1990 and 2017 averaged 15.7% in annualized returns, compared with 12.2% for the full index, S&P Global research<\/a> found. <\/p>\n

Companies in the bottom 20% of free cash flow yield averaged just 8.6% annually over the same stretch, a gap of more than seven percentage points from the top-performing quintile.<\/p>\n

Maskot\/Getty Images<\/a><\/p>\n

The calculation requires just two numbers from a company’s statement<\/a> of cash flows, which every publicly traded firm files quarterly with the Securities and Exchange Commission.<\/p>\n

Free cash flow equals cash flow from operations minus capital expenditures, capturing the actual cash left over after a business has funded both daily operations and longer-term investments. <\/p>\n

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Cash flow from operations starts with net income, adds back non-cash charges such as depreciation, and then subtracts changes in working capital<\/a> to arrive at the operating cash figure.<\/p>\n

The Schwab report pointed to the Magnificent 7 firms<\/a> as a real-world lesson in how quickly free cash flow can deteriorate when capital spending accelerates. Those companies invested hundreds of billions of dollars in AI<\/a> infrastructure during the mid-2020s, and the impact on their cash positions was immediate and dramatic for investors watching.<\/p>\n

Free cash flow growth for the group was in the 65% to 70% range annually before 2025, but it turned slightly negative for several consecutive quarters in late 2025 and early 2026. Amazon illustrates the shift most clearly, with analysts expecting its free cash flow to reach $76 billion to $105 billion by 2026 as recently as 2024, Schwab noted, citing Barron’s.<\/p>\n

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The reality landed far short of those projections. Amazon’s trailing-12-month free cash flow fell to $11.2 billion<\/a> for the period ended Dec. 31, 2025, a steep decline from $38.2 billion the prior year, according to the company’s fourth-quarter 2025 earnings release. The slide reflects Amazon’s decision to raise its 2026 capital expenditures to roughly $200 billion.<\/p>\n

Meta Platforms also felt the pressure, with JPMorgan downgrading the stock after projecting negative free cash flow of $4 billion in 2026 and $24 billion in 2027, according to TipRanks<\/a>.<\/p>\n

The same dynamic has hit the other AI hyperscalers. CNBC reported<\/a> that Alphabet’s free cash flow is projected to plummet nearly 90% in 2026, following the company’s guidance of capital expenditures between $180 billion and $190 billion.<\/p>\n

Microsoft’s cash generation also compressed sharply, Global Data Center Hub<\/a> noted, once it disclosed a $190 billion capex plan that exceeded Wall Street<\/a>‘s consensus by roughly $35 billion.<\/p>\n

“Investors who dig a little to track free cash flow might be more likely to detect downward trends in a company’s finances before they show up in earnings and revenue numbers,” Rawson said in the Schwab report.<\/p>\n

Liz Ann Sonders, chief investment strategist at Schwab, echoed the concern, noting during a Schwab Market Talk webcast<\/a> that her team is watching the big decline in free-cash-flow growth over the last five quarters, which brings back uncomfortable memories of the late 1990s.<\/p>\n

The Schwab report made the case that free cash flow provides a cleaner, cash-based snapshot of financial health than accrual-based earnings can deliver on their own. Whether the current wave of AI infrastructure<\/a> spending produces the returns executives have promised, Rawson’s central point remains: free cash flow will be the metric that tells the story.<\/p>\n

Related: Schwab has an eye-opening take on tapping your assets<\/a><\/strong><\/p>\n

The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc.<\/i><\/p>\n

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This story was originally published May 20, 2026 at 4:03 AM.<\/span><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

Every earnings season, investors zero in on two familiar numbers: earnings per share and revenue, often ignoring everything else on the report.<\/p>\n","protected":false},"author":1,"featured_media":585,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":["post-586","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-read-todays-edition"],"yoast_head":"\nSchwab says free cash flow is the metric every investor should watch - Durham Moving Hub<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/durhammovinghub.com\/?p=586\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Schwab says free cash flow is the metric every investor should watch - 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