A stock that invests heavily, good or bad sign?

2026-07-08 · By Lubin Danilo, founder of Lubin Investment

Some companies must reinvest a large share of their cash just to keep running: planes, factories, machines. Others operate with almost no physical investment. That's neither good nor bad by itself, but it completely changes how much cash is actually left for shareholders, and that's exactly what free cash flow measures.

Key takeaways

Capex is the spending a company must make to maintain or grow its operating assets (factories, machines, planes).
Two companies with the same accounting profit can have very different free cash flow depending on their capex.
Delta Air Lines, which must constantly renew its aircraft fleet, keeps only 6% of its revenue as free cash.
Qualys, a software company with almost no physical investment, keeps over 31%.
High capex isn't a flaw by itself, as long as it funds real growth and not just staying afloat.

Profit doesn't tell the whole story

A company's accounting profit (what's called net income) ignores one crucial detail: how much it has to spend on investment just to keep operating. That spending is called capex, short for capital expenditures. Buying a plane, building a factory, replacing worn-out machines: all of it stays out of accounting profit, but costs very real cash.

That's exactly why I prefer free cash flow over net income in my method: free cash flow is the cash generated by the business, minus that capex. It's what's actually left to pay down debt, pay a dividend, buy back shares, or simply sleep soundly in hard times.

Two models, two cash realities

Take Delta Air Lines. An airline must constantly maintain and renew its fleet: a plane costs tens of millions of dollars and wears out fast. As a result, out of every dollar of revenue, Delta keeps only 6 cents of free cash after paying for that upkeep, a number close to its own accounting margin, also limited to 6.9%.

Now take Qualys, a cybersecurity software company. No factory, no fleet to renew: the product is code, hosted on rented servers. As a result, Qualys keeps over 31 cents of free cash on every dollar of revenue, even more than its accounting profit (29.4%). Once developed, software costs very little to run at scale.

High capex isn't necessarily a problem

Be careful not to conclude too quickly that high capex equals a bad deal. A factory producing more each year thanks to new investment is capex funding growth, not just upkeep. The real warning sign is capex growing without sales or margins following: money going out without anything coming back. That's why I always look at free cash flow over several years, never a single isolated number.

How I use this in my method

Among my 10 criteria, the free cash flow margin (the percentage of revenue left as available cash) does exactly this job: it captures the effect of capex without me needing to comb through every line of every annual report. A high-capex company can still be a good deal, as long as its cash margin stays decent and that capex genuinely serves growth. That's the difference between investing to move forward and investing just to stay standing.

FAQ

What is capex?

Capital expenditures, the investment spending a company makes to buy, maintain, or renew its physical assets (factories, machines, planes, equipment).

Why does capex lower free cash flow?

Free cash flow is calculated by subtracting capex from the cash generated by the business. The more a company must invest to operate, the less cash is left for shareholders.

Is high capex always a bad sign?

No. Capex that funds real growth (new factories producing more) is positive. The negative signal is capex growing without sales or margins following.

Why does software have so little capex?

The product is digital: once developed, it costs very little to distribute and run at scale, unlike a factory or aircraft fleet that wears out and must be replaced.

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About the author

Written by Lubin Danilo, founder of Lubin Investment. A self-taught individual investor, I find fundamental analysis fascinating, and it has delivered excellent results. For three years now, my performance has beaten the S&P 500. But analyzing every stock took too much time: sites with incomplete data, calculation methods and criteria never aligned with mine. And spotting the best stocks was just as time-consuming, even with my own well-defined checklist. So I put my software development background to work to build this software, base my investment strategy on its results, and share it with people who share the same passion as me. It judges a company's quality and its price separately, using criteria drawn from the financial literature (Warren Buffett, Michael Mauboussin, Aswath Damodaran).