Note · Opinion, not rated
Free cash flow is not a fact.
Operating cash flow is defined by accounting standards and computed under prescribed rules. Free cash flow is not defined by anything. It is whatever the company quoting it says it is, and companies say different things.
One set of books, four answers
Take a single company with a single cash flow statement. Operating cash flow of $5,600M, capital expenditure of $5,100M, stock compensation of $1,400M added back inside that operating figure, and $800M of restructuring cash paid during the year.
Now ask four reasonable people what its free cash flow was.
| Definition | Free cash flow | Worth at 20x |
|---|---|---|
| Operating cash flow less capital expenditure | $500M | $10,000M |
| ...adding back cash paid on management actions | $1,300M | $26,000M |
| EBITDA less capital expenditure | $1,200M | $24,000M |
| ...also subtracting stock compensation | minus $900M | minus $18,000M |
The range runs from minus $900M to $1,300M. A spread of $2,200M, on identical facts, from definitions alone. At 20 times that is $44,000M of valuation.
And the sign flips. On one definition this company burns cash. On another it generates it. Nothing about the business changed between those two sentences.
These are not strawmen
Every definition in that table is in live use by a large public company, and each is defensible.
McDonald's uses the strictest common version in its filings: cash provided by operations less capital expenditures. Nothing added back. It is the version we used when we valued the company, and it is the version most readers assume they are being given.
General Motors reports adjusted automotive free cash flow, defined in its own filings as automotive operating cash flow less capital expenditures, adjusted for management actions. That final clause does real work. In the first half of 2026 GM disclosed automotive operating cash flow of $5,604 million, down 20.6 percent year over year, and adjusted automotive free cash flow of $6,302 million, up 73.2 percent.
Read those two numbers again. The adjusted free cash flow figure is $698 million larger than the operating cash flow it derives from, before subtracting a single dollar of capital expenditure. One series fell by a fifth. The other rose by nearly three quarters. They describe the same six months of the same company.
GM's accounting is correct and its definition is disclosed plainly. That is the point. No rule was broken, and a reader who took the headline figure without reading the definition would have formed a completely wrong impression of the year.
The three places the definitions diverge
Stock compensation. It is a real cost paid in shares rather than cash, so it gets added back in the operating section and never subtracted again. A company issuing $1,400M of stock to employees has transferred that much of the business to them, and the most common free cash flow definition does not see it. Subtract it and this example goes from positive to negative.
Restructuring and other management actions. Adding back cash paid on restructuring is reasonable once. The three-year test applies here as everywhere: if the same category of add-back appears every year, it is an operating cost with a better name, and the adjusted figure is describing a company that does not exist.
Working capital. A favorable swing inflates operating cash flow and therefore every definition built on it. Strip $900M of working capital benefit from this example and the strictest definition goes from $500M to minus $400M. This is exactly why our McDonald's report normalized cash conversion against the company's own guided range rather than using the trailing figure.
What to do instead
Start from operating cash flow, which is defined. It appears on a required statement under prescribed rules. Every free cash flow figure is a derivation from it, so begin at the number nobody can choose.
Subtract capital expenditure yourself. Both figures are on the cash flow statement. Doing the subtraction takes ten seconds and removes every definitional choice somebody else made for you.
Decide about stock compensation once, and apply it consistently. We treat it as a cost, because it transfers ownership. Whichever view you take, taking a different one depending on which company you are looking at is how you talk yourself into things.
Read the definition every time. Companies disclose them. They are usually a single sentence in the non-GAAP reconciliation, and almost nobody reads it. When a company defines a measure unusually, it is not hiding anything, it is telling you exactly what it did and relying on you not to look.
The pattern this site keeps returning to is that the most dangerous numbers are not the false ones. They are the true ones, correctly computed, answering a question you did not ask.