In 2016, Dropbox made a big announcement when it turned free cash flow positive — an important metric that shows a company has a strong financial position. But Dropbox's milestone may have been, in part, overstated with the help of some financial engineering.
A closer look at its financial statement shows the online storage company's free cash flow would have remained negative that year had it followed a more conservative accounting method shared by some of its main competitors.
That's because Dropbox didn't include principal payments for its capital leases in its free cash flow statement.
If Dropbox had accounted for the $139.5 million in capital and financing lease payments in 2016, it would have recorded negative $2.1 million in free cash flow that year — instead of the $137.4 million positive free cash flow it disclosed. Its free cash flow for 2017 would have been $169.7 million under this method, almost half of the $305 million it disclosed in its filing.
To be clear, there's nothing legally wrong with Dropbox's accounting method. Free cash flow is a non-GAAP measure, so companies have latitude in how they define it. The conventional rule followed by most companies, including Dropbox, is to strip out capital expenditures from operating cash flow.
But when capital lease payments (which come out of financing cash flows under GAAP rules) are a material part of the business, some companies include it in their free cash flow calculations for added transparency and relevancy. Box says it does in its filing, while Amazon provides it as a supplement. Even Dropbox's smaller and privately traded competitor Egnyte does include it, the company said.
Dropbox is in a quiet period before its IPO on Friday, so was unable to comment on this story.