From Reported to Real: The Hidden Economics of Novo Nordisk’s Cash Flow
A Deep Dive into “True” FCF
Free cash flow (FCF) has long been the go-to metric for assessing the cash-generating power of a business – especially among value (i.e. intelligent) investors.
It’s clean, it’s supposedly straightforward, and it’s splashed across valuation models like gospel.
But here’s the uncomfortable truth: reported FCF – especially when looking at a single year – often tells us very little about what a company could actually return to shareholders without compromising its long-term competitive edge.
That’s especially true in today’s economy – one that is increasingly driven by intangible investment. Think about it: R&D, brand-building, proprietary software, customer acquisition. These are the real engines of value creation in many modern businesses.
Yet under current accounting rules, these investments are (usually) simply expensed. They're treated no differently than rent or office supplies. They drag down earnings and depress FCF, even when they’re fueling the next decade of growth.
Novo Nordisk is a perfect case in point. On paper, it’s already a cash machine. Reported FCF has more than doubled between 2018 and 2024, driven by the explosive success of its GLP-1 franchise.
But if you want to understand the business more deeply – and especially if you care about valuation, capital allocation, or what Buffett once called “owner earnings” – you need to go a level deeper.
This post is about going that level deeper.
I’ve gone back to Novo’s 2018 and 2024 financials and rebuilt its “true FCF” from the ground up. I looked at these two years as I will calculate the return on incremental invested capital (ROIIC) for the investment made during this period in a follow-up post (make sure to subscribe to not miss it!).
The exercise requires judgment, yes. But I believe it’s rooted in a clear and consistent framework:
First, treating stock-based compensation (SBC) as a real cost.
Second, distinguishing between maintenance and growth capital expenditures.
And third – most crucially – recognizing that R&D should be treated like CapEx, and not just a one-time hit to the income statement.
This isn’t just an academic exercise. It changes how we think about distributable earnings. It affects how we model valuation. And most importantly, it forces us to be honest about what cash is truly “free” – and what’s being reinvested for future growth.
In the sections that follow, I’ll walk you through each adjustment I made. Along the way, we’ll look at why traditional accounting distorts FCF in intangible-heavy businesses, how Mauboussin’s work on economic earnings can sharpen our understanding, and what this all means for long-term investors trying to make sense of Novo’s current trajectory.
Let’s start with the most straightforward piece: stock-based compensation.
Disclaimer: The analysis presented in this blog may be flawed and/or critical information may have been overlooked. The content provided should be considered an educational resource and should not be construed as individualized investment advice, nor as a recommendation to buy or sell specific securities. I may own some of the securities discussed. The stocks, funds, and assets discussed are examples only and may not be appropriate for your individual circumstances. It is the responsibility of the reader to do their own due diligence before investing in any index fund, ETF, asset, or stock mentioned or before making any sell decisions. Also double-check if the comments made are accurate. You should always consult with a financial advisor before purchasing a specific stock and making decisions regarding your portfolio.
Stock-Based Compensation: A Real Expense, Not Just a Footnote
Let’s begin with the obvious – stock-based compensation (SBC). It’s the cleanest adjustment to make and arguably the least controversial. And yet, in practice, it’s often swept aside with the tired argument that it’s a “non-cash” expense. That line of reasoning, while technically correct, misses the economic reality.
Stock-based compensation may not drain cash from the company today, but it absolutely extracts value from shareholders. It dilutes existing owners, transfers economic rights to insiders, and – most importantly – represents a real cost of doing business. If you’re trying to get to true owner earnings, it needs to be treated as such.
Think of it this way: if a company paid an engineer a $300,000 salary entirely in stock, would that mean the engineer worked for free? Of course not. That equity has real economic value – and so should the expense.
So how material is SBC at Novo Nordisk?
In Novo’s case, it’s not a massive line item – but it’s not zero either. In 2018, SBC came in at $64 million. By 2024, it had grown to $318 million. Relative to revenue, that’s roughly:
2018: 64 / 17,160 = 0.37%
2024: 318 / 40,338 = 0.79%
These aren’t earth-shattering figures. SBC remains under 1% of revenue in both years. But in absolute dollar terms, the increase is significant – and ignoring it would still mean overstating distributable cash.
So I simply adjust for it directly. I subtract SBC from reported free cash flow to get an SBC-adjusted figure – a cleaner measure of what’s left over after compensating employees with real economic value. Here’s what that looks like:
2018 Reported FCF: $5,368 million
→ SBC-adjusted FCF: $5,304 million2024 Reported FCF: $10,252 million
→ SBC-adjusted FCF: $9,934 million
Not a huge swing, but we’re sharpening the lens. This adjustment gives us a more accurate baseline from which to evaluate subsequent layers – namely, CapEx and R&D.
And those, as you’ll see, have a much more meaningful impact on how we should interpret Novo’s cash-generating ability.
But before we go there, one final note: this adjustment also sends a useful signal about incentives. A company paying meaningful compensation in stock rather than cash is implicitly betting that the long-term equity value will rise. That’s fine – as long as you’re honest about the cost. But you can’t double-count it as both a growth investment and a free lunch.
For valuation purposes, SBC is compensation. And compensation is a cost.
With that cleaned up, let’s move to the more nuanced part of the equation – capital expenditures, and the challenge of separating what’s truly needed from what’s being spent to drive growth.
Not All CapEx Is Created Equal: Breaking Out Growth vs. Maintenance
If stock-based compensation is the low-hanging fruit of cash flow adjustments, CapEx is where things start to get more nuanced – and far more interesting.
By definition, free cash flow subtracts capital expenditures. That makes sense if you assume all CapEx is necessary just to keep the lights on. But that’s rarely the case.
Much of what companies spend on CapEx is discretionary – aimed at expanding production, entering new markets, or upgrading infrastructure for future returns. Treating all of it as a hit to FCF understates the true earnings power of the business.
This distinction – between maintenance CapEx and growth CapEx – is essential if you want to get to the Buffett-style notion of “owner earnings”:
the amount of cash a business can distribute without impairing its competitive position.
The CapEx Context at Novo Nordisk
Take Novo Nordisk. Reported CapEx jumped from $1.48 billion in 2018 to a whopping $6.55 billion in 2024 – more than 4x in nominal terms. In percentage of revenue, that’s a leap from 8.6% to 16.2%.
But this spike didn’t happen in a vacuum. Novo is aggressively scaling up its production footprint, particularly in response to booming demand for GLP-1 drugs like Ozempic and Wegovy. In the past couple of years, the company has announced major facility expansions in the U.S., including:
A new manufacturing site in Clayton, North Carolina
Further capacity buildouts in Fremont, California
Likely expansions in Europe to support global distribution
Arguably, this isn’t about patching up old equipment or maintaining compliance. It’s growth CapEx. It’s a bet on future scale.