\*\* This is primarily an issue for businesses that are headquartered somewhere other than the US (note: it does apply to some US-listed businesses, that are headquartered elsewhere). If you are confident you don’t/won’t own any, you can save yourself a mess of accounting babbling if not interested. \*\*
I’ve noticed a number of people on here make what I believe is a mistake when evaluating a business’ performance, so I thought I’d write a note, in case it helps our collaborative effort to invest well. As this involves international accounting regulations, and since I’m not an accountant, please apply a “this is what I think, but do not rely on me” disclaimer to everything here.. I’d rather not type variations of “as far as I’m aware” every single time I state something, so there’s your warning. Also, I did use gemini on some of the finer points of the regulations when I was beginning to realize these differences, so that’s likely not helping the reliability of this post.
Ok so, we all know that there are various ways that companies can manipulate their earnings, and have prob all heard that Free Cash Flow is a “better” way to look at things. Right off the bat, I don’t love trading depreciation for capex, as the company’s performance is likely to get a bit more “lumpy” this way (recognizing the replacement of stuff when it’s bought, which is unlikely to be even over time), but that’s really not a big deal. Does make it harder to notice a change in growth rate, but not the end of the world, and it was worth it to help keep companies honest.
The larger issue is from people using this on non-US companies that are regulated by IFRS, instead of GAAP. There are at least two big differences in accounting standards that can make \[Operating Cashflow - CapEx\] look very different for these businesses, as compared to their US counterparts (and before you quit reading, buying US-listed companies does not necessarily save you on these issues, as you’ll see).
First is Interest Paid. Under GAAP, this is required to be an Operating Cashflow, so FCF is always showing you Cashflow after Interest. This is not the case under IFRS. A company can choose to recognize it as either an Operating or Financing cashflow. Here is a link to Nomad Foods 2025 annual report:
[https://www.nomadfoods.com/wp-content/uploads/2026/05/nomad-foods-annual-report-2025.pdf](https://www.nomadfoods.com/wp-content/uploads/2026/05/nomad-foods-annual-report-2025.pdf)
On page 115 of the PDF, you will find their Cashflow statement.
Net Cash from Operating Activities 330
Purchase of P,P&E (78)
So any measure of FCF should return 252(m). I have a paid data service that I use, and it does too. But, you will note a 112m cash outflow for Interest Paid down in Financing, which makes a very big difference. And, this is even w a company that’s traded on a US exchange, but since they are headquartered in the UK, this is allowed. So had this been a US-based business, FCF would be barely above half of what you’re seeing. \[Note: if anyone uses a data source that returns \~140m FCF for this company&yr, I would be interested to know about it.\]
The other is the change in the treatment of Rent, which happened somewhere at the end of the 2010s. As I understand it, neither accounting standard now just simply debits Rent Expense and credits Cash, but what they changed to is not the same. US GAAP’s can be slightly misleading now, but IFRS is even moreso. Essentially, when a lease is signed, it goes on the balance sheet as a “Right-of-Use” Asset, and a corresponding Lease Liability. When cash is paid, it reduces the liability in one transaction, and the debit to the expense comes w a credit to reduce the asset. But, that cash paid to reduce the lease liability (the act of paying rent) is a Financing Cashflow, so you’re not seeing it in an FCF calculation any more. (there’s a slight technicality here, where a small portion could be in Operating, as they split the lease payment into a theoretical “Principal” and “Interest” portion, so the interest one might be, but the (usually) larger principal portion has to be a financing cashflow, so you’re missing at least most of it).
Here is a graph from a tool I built, that I frequently use to screen companies to know if I wish to investigate further, displaying a Swedish grocery store chain.. This is what reminded me to write this. Note the huge jump in FCF/Shr in 2020.. This is not a function of their operations actually generating more cash, nor a reduction in their capex. It’s a simple change to the accounting rules regarding what goes where. I see the same dislocation between Earnings and FCF in many businesses starting in 2019 / 2020. Presumably depending on when their financial year ends, and if they have large enough lease payments to materially affect FCF.
[https://imgur.com/a/jwfizk1](https://imgur.com/a/jwfizk1)
As far as I’ve seen, there’s no handy way to automatically back out these changes to calculate what fcf was meant to show us, at least w the data types that my service lets me see. Since some of it ends up in depreciation, you likely can’t even manually do it yourself by just looking at the company’s big 3 financial statements. Prob requires a descent into the Notes to dig up the amount of D&A that was due to lease accounting rules, and rebuild an FCF measurement from there. I should add here that I’ve seen many companies do this in their Adjusted statements for us, which is what alerted me to this change in the first place, but it appears less common for European companies to publish adjusted figures, at least in my experience. This particular company does not.
As always, more than open to any rebuttals, I could easily have made a mistake / be misinformed. But, if you don’t know that I’m wrong, at least proceed with caution when using this measurement on non-US companies (for the \~2% of ppl on here that look beyond US markets), cuz I think I’m right. Hopefully this helps some ppl out there, and our discussions and analyses can be a little more accurate.
