Evidence from 238 non-GAAP cash flow metrics and 562 reconciling adjustments reveals where S&P 500 companies diverge in their free cash flow presentations.
Some companies do adjust for changes in working capital, such as receivables and payables. But I think the key point are (1) given the limitations of the metric, FCF should not be viewed or characterized as a residual cash flow that can be used for discretionary spending and (2) investors should be careful if they rely on the FCF numbers reported by the companies and at the very least understand how the measure was constructed.
Free cash flow should be adjusted to account for variations in AR and AP.
Delaying the payment of bills until after quarter end doesn't provide discretionary cash, but the extra payables end up in free cash flow.
Some companies do adjust for changes in working capital, such as receivables and payables. But I think the key point are (1) given the limitations of the metric, FCF should not be viewed or characterized as a residual cash flow that can be used for discretionary spending and (2) investors should be careful if they rely on the FCF numbers reported by the companies and at the very least understand how the measure was constructed.
Great Read, Thanks Olga!
Thank you!