Company's free cash flow is the cash that it can generate after deducing all the investments needed to maintain and expand its assets.
Free cash flow could be calculated in different ways. General definition is earnings before interest after taxes plus depreciation and amortization and minus changes in working capital and CAPEX.
Many investors view free cash flow as more accurate measure of real company's profitability than net income, because free cash flow takes into account company's investments in its asset base and eliminates debt leverage effect with which net income can be easily manipulated.
Free Cash Flow Margin is a measure of company's profitability. It is calculated as Free Cash Flow divided by Sales.
Free Cash Flow Margin represents company's profitability because it shows how many dollars of free cash flow company gets from each dollar of its' sales. Free Cash Flow Margin also indicates how efficiently company manages its' expenses, including CAPEX.
Free Cash Flow Margin can be useful for two purposes:
- Comparison of different companies profitability;
- Analysis of trends in company's profitability.
One should note that Free Cash Flow Margin may differ significantly across industries, so the comparison makes sense only for companies from the same industry. The most difference could be found among young companies or companies with high level of CAPEX.
As was stated above, many investors consider free cash flow as a better measure for actual cash generated by company than net income. Thus, Free Cash Flow Margin may be a better metric to determine company's profitability than Net Margin.
Generally, the higher Free Cash Flow Margin the better.
Companies from S&P 500 Top 50 Index with the highest FCF Margin.
|Philip Morris International||PM||29.91%|
Companies from ASX 50 Index with the highest FCF Margin.
|National Australia Bank||NAB||62.49%|
|Sydney Airport Units||SYD||48.09%|
|Fortescue Metals Group||FMG||41.20%|
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