Description
Free Cash Flow (FCF) is the amount of actual cash a company generates after costs related to maintaining and growing the business are accounted for. Typically, it is calculated in the Statement of Cash Flow by taking “Total Cash Flow from Operating Activity” and subtracting “Capital Expenditures” (the cost of maintaining or growing the business). The Free Cash Flow Margin is simply FCF expressed as a percentage of revenue.
Calculation
FCF Margin = FCF / Revenue X 100
What it means
Like the Gross Margin, Operating Margin, and Net Margin, the Free Cash Flow Margin enables an investor to evaluate how profitable a corporation is. However, because the FCF margin uses cash instead of earnings, it is often considered a more important metric. This is because cash is the most liquid investment and allows companies to invest or make purchases quickly if needed (vs. having to wait to be paid or to liquidate existing assets).