Free Cash Flow Margin
Free Cash Flow (FCF) Margin is an alternative measure of profitability that reveals how much cash a company generates from its revenues. As a general rule, we prefer an FCF Margin of at least 20%.
FCF offers some useful alternatives to net income. It excludes non-cash expenses and includes capital expenditures. Not only is it more difficult to manipulate than earnings, it can also reveal potential problems earlier.
General Formula
FCF Margin = (Operating Cash Flow - CAPEX) / Revenue
As a general rule, earnings and free cash flow should be in sync. That is, they should be rising over long periods of time at roughly the same rate. If these are diverging, it should require further investigation. For example, are accounts receivable growing at a faster rate than earnings? If so, it could mean that sales aren't turning into cash.
Another red flag is when companies have too many "one time" capital expenditures. This too, requires further research to determine if these become permanent which will a drag on future cash flows.
Detailed Formula
