Free Cash Flow Conversion (FCF) (2024)

FAQs

Free Cash Flow Conversion (FCF)? ›

Free Cash Flow Conversion is a liquidity ratio that measures a company's ability to convert its operating profits into free cash flow (FCF) in a given period. By comparing a company's available free cash flow to an operating metric, the FCF conversion rate helps evaluate the quality of a company's cash flow generation.

To have a healthy free cash flow, you want to have enough free cash on hand to be able to pay all of your company's bills and costs for a month, and the more you surpass that number, the better. Some investors and analysts believe that a good free cash flow for a SaaS company is anywhere from about 20% to 25%.

The simplest way to calculate free cash flow is by finding capital expenditures on the cash flow statement and subtracting it from the operating cash flow found in the cash flow statement.

The FCF ratio is the ratio of free cash flow to operating cash flow. Free cash flow is the cash left over after deducting capital expenditures from operating cash flow. Capital expenditures are the cash spent on acquiring or maintaining long-term assets, such as buildings, equipment, and software.

FCFF and FCFE are related to each other as follows: FCFE = FCFF – Int(1 – Tax rate) + Net borrowing.

If the FCF conversion rate of a company is in excess of 100%, that implies operational efficiency. In contrast, “bad” FCF conversion would be well below 100% – and can be particularly concerning if there has been a distinct pattern showing deterioration in cash flow quality year-over-year.

A good price to cash flow ratio is anything below 10. The lower the number, the better the value of the stock. This is because a lower ratio indicates that the company is undervalued with respect to its cash flows.

So, is cash flow the same as profit? No, there are stark differences between the two metrics. Cash flow is the money that flows in and out of your business throughout a given period, while profit is whatever remains from your revenue after costs are deducted.

The upshot: Positive free cash flow means you have sufficient money to invest back into the business for growth or to distribute to shareholders. Negative free cash flow could portend that you'll need to raise money to pay the rent or there's a potential for healthier competitors to outperform you in the market.

Free cash flow can be calculated in various ways, depending on audience and available data. A common measure is to take the earnings before interest and taxes, add depreciation and amortization, and then subtract taxes, changes in working capital and capital expenditure.

What is Tesla's FCF ratio? ›

Hence, Tesla's Price-to-Free-Cash-Flow Ratio for today is 439.29. During the past 13 years, Tesla's highest Price-to-Free-Cash-Flow Ratio was 544.60. The lowest was 27.53. And the median was 160.80.

A "good" or "bad" FCF margin can vary significantly based on a company's core operations, industries, and business models. Therefore, as a general guideline: Most businesses typically aim for an FCF margin of around 10% to 15% or more which shows that they are generating cash flow from their core activities.

The result must be placed in context to make the free cash flow-to-sales ratio meaningful. Generally, a ratio higher than five percent is preferable. Essentially, this indicates a company's robust ability to pull in enough cash to keep growing. This will also serve the company well when trying to please shareholders.

The generic Free Cash Flow (FCF) Formula is equal to Cash from Operations minus Capital Expenditures. FCF represents the amount of cash generated by a business, after accounting for reinvestment in non-current capital assets by the company.

Calculating Free Cash Flow in Excel

Enter "Total Cash Flow From Operating Activities" into cell A3, "Capital Expenditures" into cell A4, and "Free Cash Flow" into cell A5. Then, enter "=80670000000" into cell B3 and "=7310000000" into cell B4. To calculate Apple's FCF, enter the formula "=B3-B4" into cell B5.

Free cash flow to firm (FCFF) is a portion of a company's cash that could be distributed without affecting its operations. FCFF=EBIT× (1-tax rate)+Non-cash expenses-Capital Expenditure-Change in working capital. FCFF provides important insights into the value and health of a company.

The result must be placed in context to make the free cash flow-to-sales ratio meaningful. Generally, a ratio higher than five percent is preferable. Essentially, this indicates a company's robust ability to pull in enough cash to keep growing. This will also serve the company well when trying to please shareholders.

As such, in general, the higher the free cash flow yield, the better. A higher value signifies that you have more cash on hand to use after taking care of your obligations to keep operations running smoothly. On the contrary, a lower FCF yield would show that your capital is limited.

A "good" or "bad" FCF margin can vary significantly based on a company's core operations, industries, and business models. Therefore, as a general guideline: Most businesses typically aim for an FCF margin of around 10% to 15% or more which shows that they are generating cash flow from their core activities.

It all depends on the specific industry and company in question. However, a healthy ratio would generally fall between 1.0 and 2.0, with anything above 2.0 being considered very strong. This indicates that the company has more than enough operational cash flow to cover its total debt.