What is a good value for FCF yield?

The higher the levered FCF yield, the better since this implies the company is generating more cash that could be used to benefit equity shareholders (e.g., dividends, buybacks) and reinvest into the growth of the business.

What is a good FCF margin?

Well, while there's no one-size-fits-all ratio that your business should be aiming for – mainly because there are significant variations between industries – a higher cash flow margin is usually better. A cash flow margin ratio of 60% is very good, indicating that Company A has a high level of profitability.

What is a good P FCF number?

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.

Do you want a high or low FCF?

When free cash flow is positive, it indicates the company is generating more cash than is used to run the business and reinvest to grow the business . It's fully capable of supporting itself, and there is plenty of potential for further growth.

Should FCF be high or low?

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.

How do you interpret FCF yield?

A higher free cash flow yield is better because then the company is generating more cash and has more money to pay out dividends, pay down debt, and re-invest into the company . A lower free cash flow yield is worse because that means there is less cash available.

Is a high FCF margin good?

Again, the higher the FCF margin, the better . This means you have capital on hand to deploy even after taking care of your current financial obligations. It shows you were efficient in turning revenues into cash that could be spent on financing activities.

What does free cash flow tell you?

What Does Free Cash Flow Tell You? Free cash flow tells you how much cash a company has left over after paying its operating expenses and maintaining its capital expenditures —in short, how much money it has left after paying the costs to run its business.

Is increasing FCF good?

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.

An abundant amount of FCF also shows that a company is generating more cash than it needs. Companies can also use their FCF to expand business operations or pursue other investments. So, when measuring a company's growth potential, FCF could serve as a better metric than earnings .

What is the average FCF yield of the S&P 500?

As of July 31, 2023, the S&P 500 Sector-Neutral FCF Index had a 9.77% weighted average FCF yield versus 4.08% for the S&P 500 (see Exhibit 4).

What's a Good Free Cash Flow? Calculate + Interpret FCF (2024)

For publicly traded companies, it’s the money left over from operational activities that you can use to pay off debts, pay out dividends, or make acquisitions. As a company matures and moves toward an IPO, free cash flow helps investors and lenders understand the true value of a company and its ability to pay a return on investment.

Companies typically report free cash flow on an annual basis, so you’ll see them in 10-K filings. However, you could also report on free cash flow quarterly in 10-Qs. Internally, if you’re nearing an IPO or already operating a public company, focus on having a real-time understanding of free cash flow and other financial metrics.

How Is Free Cash Flow Calculated?

Free cash flow is an important financial ratio used to analyze a company. There are multiple ways to calculate your free cash flow, all of which should return the same numbers (or roughly the same).

The simplest method is to take your operating cash flow from your statement of cash flows and subtract any capital expenditures (capex) from it.

Simple free cash flow formula

You could also use a variety of net income statements and balance sheet line items to get to your free cash flow number. Here are a couple of different methods:

Why Does Free Cash Flow Matter? + How to interpret FCF

There are two sides to a discussion about why free cash flow matters —the internal side and the investor side.

Free cash flow is an important part of overall cash flow analysis because it gives internal finance teams and executives an idea of the position you’re in to re-invest in the business. Do you have the amount of cash needed to develop new products? Can you invest in expanding your presence into new markets? Are you able to buy back stock or pay dividends to keep investors happy? Is there an opportunity to acquire a company to improve your business?

These are all questions you can discuss internally, depending on whether or not you have good visibility into free cash flow.

But on the investor side, free cash flow matters because it gives people an idea of how healthy your business really is. It gives investors a quick look at your company’s profitability and the starting point for a deeper analysis of your business model.

Ultimately, they’ll want to see that you’re putting free cash flow to good use in terms of generating shareholder value. This can make free cash flow and related metrics a critical part of your investor updates. That doesn’t mean you always have to have positive free cash flow — but it does mean that you have to strategically invest profits to continue growing.

What is Free Cash Flow Margin?

While we’ve discussed what free cash flow is and how it’s calculated, an equally important concept is the free cash flow margin. This metric measures how much of a company’s revenue is converted into free cash flow. It’s an indicator of the efficiency with which a company manages its operating costs and capital expenditures.

Calculating and Interpreting Free Cash Flow Margin

To calculate the free cash flow margin, simply divide the free cash flow by the total revenue and multiply by one hundred. This calculation gives you a ratio that represents the fraction of each dollar of revenue that remains as free cash flow.

Free cash flow margin formula

A higher free cash flow margin suggests that the company is effectively controlling its costs and is efficient in its operations. It’s a sign of a healthy, well-run business with the potential for growth and profitability.

Free Cash Flow Margin Calculator

Operating Cash Flow

Capital Expenditures

Total Revenue

Your Free Cash Flow Margin

Why Free Cash Flow Margin Matters

In the context of financial analysis and investor evaluation, free cash flow margin offers a more nuanced view of a company’s financial health than free cash flow alone. It helps in understanding not just how much cash is generated, but how efficiently it’s generated relative to the company’s sales. This efficiency is key in sectors where managing operational and capital costs is crucial for profitability.

What’s Considered “Good” Free Cash Flow?

Free cash flow analysis can tell you many things, but it helps to understand what’s considered good free cash flow within your industry. 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%.

We often talk about using the SaaS rule of 40to quickly gauge your balance between growth and profitability. That’s great for companies that are progressing toward an IPO and can work even beyond that point.

But you should also consider evaluating “good” free cash flow in terms of Bessemer’s efficiency score —the sum of your growth percentage and free cash flow margin percentage. Like the rule of 40, anything above 40 in this calculation is considered “good” and bodes well for the valuation of your SaaS company.

Challenges in Tracking Free Cash Flow

The main challenge of tracking free cash flow is adding the necessary context to tell your company’s financial story well.

Free cash flow doesn’t come with the same disclosure requirements that you see in other areas of finance reports, which means it’s not as straightforward as the rest of your financial statement line items. This leaves investors to calculate free cash flow manually if you don’t parse it out on your own.

The result could be a misunderstanding of the company narrative by analysts and investors. For example, you may have a significant drop in free cash flow year-over-year — but it’s actually a positive event because you acquired a company that dramatically expanded your total addressable market.

Manual calculations across the entire financial reporting process can make it difficult to focus on the narrative when you present to investors and board members. By automating the tedious data collection and calculation processes month-to-month and quarter-to-quarter, you’ll be able to spend more time crafting the narrative of the true health of your business.

Get A Better Understanding of the Health of Your Company with Advanced FCF Tracking

With an in-depth awareness of your company’s free cash flow, you’ll have the ability to make effective decisions for the future of your business, as well as understand how investors will view your company’s financial health and bottom line.

Mosaic can help make calculating and tracking important metrics like free cash flow even easier by automating the process. By pulling together data from your existing systems, Mosaic significantly reduces the time your team spends compiling data and calculating metrics while reducing the possibility of human error. Instead, your finance team can focus on what’s happening with your company’s finances in real time and easily model future scenarios with the click of a button that can help your company focus on growth.

Instead of relying on spreadsheets and manual calculations to track the health and growth of your business, consider Mosaic. Get a personalized demoto see how Mosaic can provide a comprehensive overview of the health of your business.