Free Cash Flow Margin %
Efficiency
Financials
Liquidity
Industry:
Sector Agnostic
Short Definition
Free Cash Flow (FCF) Margin % is the percentage of revenue that turns into Free Cash Flow. It shows how efficiently the business converts sales into cash left after Capital Expenditures (CapEx).
Short Definition
Free Cash Flow (FCF) Margin % is the percentage of revenue that turns into Free Cash Flow. It shows how efficiently the business converts sales into cash left after Capital Expenditures (CapEx).
Short Definition
Free Cash Flow (FCF) Margin % is the percentage of revenue that turns into Free Cash Flow. It shows how efficiently the business converts sales into cash left after Capital Expenditures (CapEx).
Why it matters for Investors
Cash quality: Tests if accounting profit becomes cash.
Funding capacity: Higher margin = more self-funded growth and debt capacity.
Valuation anchor: Cash yield proxy for private and public comps.
Why it matters for Investors
Cash quality: Tests if accounting profit becomes cash.
Funding capacity: Higher margin = more self-funded growth and debt capacity.
Valuation anchor: Cash yield proxy for private and public comps.
Why it matters for Investors
Cash quality: Tests if accounting profit becomes cash.
Funding capacity: Higher margin = more self-funded growth and debt capacity.
Valuation anchor: Cash yield proxy for private and public comps.
Formula
Practical considerations:
Be consistent: Same CFO and CapEx policy each period (capitalized software, lease principal).
Exclude financing flows: Debt/equity cash flows are not in FCF.
Optionally show “excluding Working Capital (WC)”: If working capital swings are lumpy, also show FCF Margin before WC (label it).
Formula
Practical considerations:
Be consistent: Same CFO and CapEx policy each period (capitalized software, lease principal).
Exclude financing flows: Debt/equity cash flows are not in FCF.
Optionally show “excluding Working Capital (WC)”: If working capital swings are lumpy, also show FCF Margin before WC (label it).
Formula
Practical considerations:
Be consistent: Same CFO and CapEx policy each period (capitalized software, lease principal).
Exclude financing flows: Debt/equity cash flows are not in FCF.
Optionally show “excluding Working Capital (WC)”: If working capital swings are lumpy, also show FCF Margin before WC (label it).
Worked Example
Line Item (TTM) | Amount ($) | Notes |
|---|---|---|
Cash Flow from Operations (CFO) | $8,400,000 | From the cash-flow statement; includes working capital |
Capital Expenditures (CapEx) | $(3,200,000) | PP&E and capitalized software spend |
Free Cash Flow (FCF) | $5,200,000 | CFO − CapEx |
Revenue (TTM) | $52,000,000 | For margin calculation |
FCF Margin (%) | 10.0% | (5.2 ÷ 52.0) × 100 |
Notes:
Start from Cash Flow from Operations (CFO): This is the real cash your business generated after paying all day-to-day expenses. It already includes adjustments for non-cash items like depreciation and stock-based comp.
Subtract Capital Expenditures (CapEx): These are big, long-term purchases (like equipment, office buildouts, or capitalized software). Removing them shows how much cash is left after keeping the business running.
Result = Free Cash Flow (FCF): This is the cash available for owners and lenders after the business has reinvested in itself.
FCF Margin (%) = FCF ÷ Revenue × 100: This shows what portion of every $1 of sales ends up as true free cash. Example: 10% FCF Margin means the company keeps $0.10 in free cash for every $1 earned.
Interpretation:
A positive FCF Margin means the business can fund itself and grow without outside money.
A negative FCF Margin is fine for high-growth startups if cash is being spent to win customers or expand capacity — investors just check that the Burn Multiple and unit economics make sense.
Worked Example
Line Item (TTM) | Amount ($) | Notes |
|---|---|---|
Cash Flow from Operations (CFO) | $8,400,000 | From the cash-flow statement; includes working capital |
Capital Expenditures (CapEx) | $(3,200,000) | PP&E and capitalized software spend |
Free Cash Flow (FCF) | $5,200,000 | CFO − CapEx |
Revenue (TTM) | $52,000,000 | For margin calculation |
FCF Margin (%) | 10.0% | (5.2 ÷ 52.0) × 100 |
Notes:
Start from Cash Flow from Operations (CFO): This is the real cash your business generated after paying all day-to-day expenses. It already includes adjustments for non-cash items like depreciation and stock-based comp.
Subtract Capital Expenditures (CapEx): These are big, long-term purchases (like equipment, office buildouts, or capitalized software). Removing them shows how much cash is left after keeping the business running.
Result = Free Cash Flow (FCF): This is the cash available for owners and lenders after the business has reinvested in itself.
FCF Margin (%) = FCF ÷ Revenue × 100: This shows what portion of every $1 of sales ends up as true free cash. Example: 10% FCF Margin means the company keeps $0.10 in free cash for every $1 earned.
Interpretation:
A positive FCF Margin means the business can fund itself and grow without outside money.
A negative FCF Margin is fine for high-growth startups if cash is being spent to win customers or expand capacity — investors just check that the Burn Multiple and unit economics make sense.
Worked Example
Line Item (TTM) | Amount ($) | Notes |
|---|---|---|
Cash Flow from Operations (CFO) | $8,400,000 | From the cash-flow statement; includes working capital |
Capital Expenditures (CapEx) | $(3,200,000) | PP&E and capitalized software spend |
Free Cash Flow (FCF) | $5,200,000 | CFO − CapEx |
Revenue (TTM) | $52,000,000 | For margin calculation |
FCF Margin (%) | 10.0% | (5.2 ÷ 52.0) × 100 |
Notes:
Start from Cash Flow from Operations (CFO): This is the real cash your business generated after paying all day-to-day expenses. It already includes adjustments for non-cash items like depreciation and stock-based comp.
Subtract Capital Expenditures (CapEx): These are big, long-term purchases (like equipment, office buildouts, or capitalized software). Removing them shows how much cash is left after keeping the business running.
Result = Free Cash Flow (FCF): This is the cash available for owners and lenders after the business has reinvested in itself.
FCF Margin (%) = FCF ÷ Revenue × 100: This shows what portion of every $1 of sales ends up as true free cash. Example: 10% FCF Margin means the company keeps $0.10 in free cash for every $1 earned.
Interpretation:
A positive FCF Margin means the business can fund itself and grow without outside money.
A negative FCF Margin is fine for high-growth startups if cash is being spent to win customers or expand capacity — investors just check that the Burn Multiple and unit economics make sense.
Best Practices
Reconcile clearly: Show CFO → FCF → FCF Margin % each period.
Use Trailing Trailing Twelve Months: Prefer last 12 months to smooth lumpy cash and CapEx instead of a single quarter. Cash can be lumpy - a big customer paying late or a one-time equipment purchase can make one quarter look worse or better than normal. Adding the last 4 quarters together smooths these bumps and shows your typical FCF Margin.
Publish CapEx policy: Specify what counts (PP&E, capitalized software) and keep it consistent.
Show an “ex-WC” view: Also report FCF before working capital if Accounts Receivables / Accounts Payables/ Inventory swings are large.
Split CapEx: Separate maintenance vs growth CapEx to explain cash needs.
Segment if material: Product/region/business unit to find cash creators vs drainers.
Pair with other signals: Track alongside EBITDA Margin, Burn Multiple, Rule of 40, Cash Runway.
Watch timing games: Note if payables are stretched or receivables pulled forward; call out one-offs.
Best Practices
Reconcile clearly: Show CFO → FCF → FCF Margin % each period.
Use Trailing Trailing Twelve Months: Prefer last 12 months to smooth lumpy cash and CapEx instead of a single quarter. Cash can be lumpy - a big customer paying late or a one-time equipment purchase can make one quarter look worse or better than normal. Adding the last 4 quarters together smooths these bumps and shows your typical FCF Margin.
Publish CapEx policy: Specify what counts (PP&E, capitalized software) and keep it consistent.
Show an “ex-WC” view: Also report FCF before working capital if Accounts Receivables / Accounts Payables/ Inventory swings are large.
Split CapEx: Separate maintenance vs growth CapEx to explain cash needs.
Segment if material: Product/region/business unit to find cash creators vs drainers.
Pair with other signals: Track alongside EBITDA Margin, Burn Multiple, Rule of 40, Cash Runway.
Watch timing games: Note if payables are stretched or receivables pulled forward; call out one-offs.
Best Practices
Reconcile clearly: Show CFO → FCF → FCF Margin % each period.
Use Trailing Trailing Twelve Months: Prefer last 12 months to smooth lumpy cash and CapEx instead of a single quarter. Cash can be lumpy - a big customer paying late or a one-time equipment purchase can make one quarter look worse or better than normal. Adding the last 4 quarters together smooths these bumps and shows your typical FCF Margin.
Publish CapEx policy: Specify what counts (PP&E, capitalized software) and keep it consistent.
Show an “ex-WC” view: Also report FCF before working capital if Accounts Receivables / Accounts Payables/ Inventory swings are large.
Split CapEx: Separate maintenance vs growth CapEx to explain cash needs.
Segment if material: Product/region/business unit to find cash creators vs drainers.
Pair with other signals: Track alongside EBITDA Margin, Burn Multiple, Rule of 40, Cash Runway.
Watch timing games: Note if payables are stretched or receivables pulled forward; call out one-offs.
FAQs
What does FCF Margin tell me?
It shows how much of every $1 of revenue turns into real free cash after paying for all operating needs and investments (CapEx).Is a higher FCF Margin always better?
Mostly yes. A higher margin means the business is self-sustaining. But if it’s too high, check if the company is under-investing in growth (low CapEx or marketing).Can FCF Margin be negative?
Yes. It’s common in early-stage or fast-growing companies that spend heavily to expand. It’s okay if unit economics are strong and cash burn is improving.How is FCF Margin different from EBITDA Margin?
EBITDA Margin ignores CapEx and working-capital changes (it’s before cash timing). FCF Margin includes those and shows actual cash left.Does FCF Margin include stock-based comp?
If you remove SBC, FCF would be lower. So yes, FCF includes SBC — but only because it’s an accounting add-back, not real cash.Why use FCF Margin instead of just Net Income Margin %?
Net income is based on accounting rules. FCF Margin shows real cash the business generates — what investors actually care about.
FAQs
What does FCF Margin tell me?
It shows how much of every $1 of revenue turns into real free cash after paying for all operating needs and investments (CapEx).Is a higher FCF Margin always better?
Mostly yes. A higher margin means the business is self-sustaining. But if it’s too high, check if the company is under-investing in growth (low CapEx or marketing).Can FCF Margin be negative?
Yes. It’s common in early-stage or fast-growing companies that spend heavily to expand. It’s okay if unit economics are strong and cash burn is improving.How is FCF Margin different from EBITDA Margin?
EBITDA Margin ignores CapEx and working-capital changes (it’s before cash timing). FCF Margin includes those and shows actual cash left.Does FCF Margin include stock-based comp?
If you remove SBC, FCF would be lower. So yes, FCF includes SBC — but only because it’s an accounting add-back, not real cash.Why use FCF Margin instead of just Net Income Margin %?
Net income is based on accounting rules. FCF Margin shows real cash the business generates — what investors actually care about.
FAQs
What does FCF Margin tell me?
It shows how much of every $1 of revenue turns into real free cash after paying for all operating needs and investments (CapEx).Is a higher FCF Margin always better?
Mostly yes. A higher margin means the business is self-sustaining. But if it’s too high, check if the company is under-investing in growth (low CapEx or marketing).Can FCF Margin be negative?
Yes. It’s common in early-stage or fast-growing companies that spend heavily to expand. It’s okay if unit economics are strong and cash burn is improving.How is FCF Margin different from EBITDA Margin?
EBITDA Margin ignores CapEx and working-capital changes (it’s before cash timing). FCF Margin includes those and shows actual cash left.Does FCF Margin include stock-based comp?
If you remove SBC, FCF would be lower. So yes, FCF includes SBC — but only because it’s an accounting add-back, not real cash.Why use FCF Margin instead of just Net Income Margin %?
Net income is based on accounting rules. FCF Margin shows real cash the business generates — what investors actually care about.
Related Metrics
Commonly mistaken for:
EBITDA Margin % (excludes CapEx and working-capital timing; it shows profit before cash movement, not actual free cash)
Operating Cash Flow Margin % (uses CFO before CapEx; FCF Margin goes one step further by subtracting CapEx)
Net Income Margin % (based on accounting profit, not real cash; FCF Margin reflects actual cash left after reinvestment)
Related Metrics
Commonly mistaken for:
EBITDA Margin % (excludes CapEx and working-capital timing; it shows profit before cash movement, not actual free cash)
Operating Cash Flow Margin % (uses CFO before CapEx; FCF Margin goes one step further by subtracting CapEx)
Net Income Margin % (based on accounting profit, not real cash; FCF Margin reflects actual cash left after reinvestment)
Related Metrics
Commonly mistaken for:
EBITDA Margin % (excludes CapEx and working-capital timing; it shows profit before cash movement, not actual free cash)
Operating Cash Flow Margin % (uses CFO before CapEx; FCF Margin goes one step further by subtracting CapEx)
Net Income Margin % (based on accounting profit, not real cash; FCF Margin reflects actual cash left after reinvestment)
Source of:
Index