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FCF Margin

In short

What percentage of revenue turns into free cash flow

If a business earns $100 in sales and has $15 left after paying all its bills and investing in the equipment needed to keep running, its FCF margin is 15%. Cash is what actually funds dividends, buybacks, and debt paydown — accounting profit alone doesn't.

FCF margin divides free cash flow (operating cash flow minus capital expenditures) by revenue, showing what share of each sales dollar converts into cash the business can actually deploy. Capital intensity drives most of the sector variation: asset-light software or services businesses can convert 20-30%+ of revenue to cash, while capital-intensive sectors like telecom, utilities, or semiconductors run structurally lower margins because they must keep reinvesting heavily in equipment. One distortion worth knowing: operating cash flow adds back stock-based compensation as a non-cash expense, even though it's a real cost to shareholders through dilution — so FCF margin can overstate cash generation at companies that pay employees heavily in stock, a pattern especially common in software.

Formula

FCF Margin = Free Cash Flow ÷ Revenue × 100

Thresholds

<5
Thin — capital-intensive
5-15
Average
15-25
Strong cash generation
>25
Exceptional — cash machine

Related concepts

  • Net Margin — Net margin is what's left after EVERY expense — cost of goods, rent, salaries, interest on debt, and taxes. If a company brings in $100 of revenue and keeps $12 after all of that, its net margin is 12%. It's the strictest profitability measure, sitting below gross and operating margin since it also absorbs financing costs and one-time items.
  • Operating Margin — After paying for the ingredients AND the rent, salaries, marketing, and everything else it takes to run the business day to day, what percentage of each sales dollar is left? A retailer selling $100 of goods and clearing $8 after all of that has an 8% operating margin — before interest and taxes are even considered.
  • Free Cash Flow Yield — If a company is worth $1B on the stock market and generates $80M in free cash over the year, its FCF yield is 8%. Think of it as the 'real' earnings yield — built on actual cash the business throws off, rather than accounting profits that can include non-cash items.