Definition
Free cash flow margin shows free cash flow as a share of revenue, reflecting how much revenue turns into cash after CapEx.
Formula
Free cash flow margin = free cash flow / revenue
Example
Free cash flow $500k on $5M revenue yields a 10% margin.
How to use it
- Track margin over time to see operating leverage and discipline.
- Use normalized CapEx for comparability across years.
Common mistakes
- Treating one-time working capital releases as recurring margin.
- Comparing margins without adjusting for seasonality.
Measured as
Free cash flow margin = free cash flow / revenue
Misused when
- Treating one-time working capital releases as recurring margin.
- Comparing margins without adjusting for seasonality.
Operator takeaway
- Track margin over time to see operating leverage and discipline.
- Use normalized CapEx for comparability across years.
- Tie Free Cash Flow Margin to the same balance-sheet date, scenario, and decision memo you are using elsewhere in the model.
- Document which claims, costs, or adjustments your team includes before comparing numbers across forecasts, covenants, or valuation work.
Next decision
- Read Runway and burn: gross vs net burn, working capital, and cash levers if the decision depends on interpretation, policy, or trade-offs beyond the raw formula.
- Decide whether Free Cash Flow Margin belongs in cash planning, valuation, or debt monitoring so the number is used in the right model.
Where to use this on MetricKit
Guides
- Runway and burn: gross vs net burn, working capital, and cash levers: A practical guide to runway: compute net burn, understand why cash differs from profit, and how working capital and collections change runway.
- Investment decision metrics: NPV vs IRR vs payback vs PI: A practical guide to investment decision metrics: when to use NPV, when IRR misleads, and how payback and profitability index fit in.