Free Cash Flow Margin
Free Cash Flow Margin
Free cash flow (operating cash flow less capital expenditures) as a fraction of revenue: the share of each sales dollar that ends up as cash the company can distribute or reinvest.
When to use: Use alongside net margin. A wide gap between the two, in either direction, points to heavy capital spending, working-capital swings, or aggressive accounting.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| FCFMargin | FCF Margin | Free cash flow as a fraction of revenue | % |
| CFO | Cash Flow from Operations | Net cash generated by operating activities (from the cash flow statement) | $ |
| CapEx | Capital Expenditures | Cash spent on property, plant, and equipment | $ |
| Sales | Annual Sales | Annual revenue (net sales) | $ |
Real-Life Examples
Example 1: Asset-Light Business
CFO $500M, CapEx $150M, revenue $2,000M.
Given
Step-by-Step
Seventeen and a half cents of every revenue dollar is free cash. Combined with a 25% operating cash flow margin, capital spending consumes about 30% of operating cash.
Example 2: Capital-Intensive Business
CFO $90M, CapEx $60M, revenue $1,200M.
Given
Step-by-Step
Only 2.5% of revenue survives as free cash. Two thirds of operating cash goes straight back into the asset base, which is typical of manufacturing, utilities and transport.
Frequently Asked Questions
All cash spent on property, plant and equipment, both maintenance and growth. Some analysts subtract only maintenance capex to get a margin closer to sustainable distributable cash.