SEC comments on Free Cash Flow metrics - which adjustments are prohibited?

Over the past five years, the SEC flagged over a hundred companies with insufficient FCF-related disclosure. In many cases, SEC requested that companies remove or modify the FCF metric.

Free Cash Flow (FCF)—a non-GAAP metric typically defined as cash from operations less capital expenditures (CAPEX)—is one of the key financial metrics used by investors and analysts to gauge a company's financial health. It indicates the amount of cash available for distribution to shareholders, debt repayment, or reinvestment in the business.

The importance of the free cash flow metric implies that investors need to understand how the metric is calculated, which adjustments are included, and, if the definition of the metric changed from the previous period, what triggered the change.

Nicola White reported for Bloomberg on May 1, 2024, that the SEC’s Corp Fin repeatedly flagged companies that presented non-GAAP metrics that overshadowed GAAP results or were misleading:

“Companies and auditors have heard the SEC repeatedly warn against overplaying unofficial…