![]() The formula for calculating the free cash flow conversion (FCF) rate is as follows.įree Cash Flow Conversion (FCF) = Free Cash Flow ÷ EBITDA To evaluate the true operating performance of a company and accurately forecast its future cash flows, these additional cash outflows and other non-cash (or non-recurring) adjustments are required to be accounted for. But while the calculation of EBITDA does add-back depreciation and amortization (D&A), which are usually the most significant non-cash expense for companies, EBITDA neglects two major cash outflows: In theory, EBITDA should function as a rough proxy for a company’s operating cash flow. The objective here is to compare a company’s free cash flow (FCF) in a given period to its EBITDA, in an effort to better understand how much FCF diverges from EBITDA.Ĭalculating the FCF conversion ratio comprises dividing free cash flow (FCF) by a measure of profit, such as EBITDA (or EBIT). The free cash flow conversion rate (FCF) measures a company’s efficiency at turning its profits into free cash flow from its core operations. ![]() ![]() How to Calculate Free Cash Flow Conversion (FCF)? Free Cash Flow Conversion is a liquidity ratio that measures a company’s ability to convert its operating profits into free cash flow (FCF) in a given period.īy comparing a company’s available free cash flow along with a profitability metric, the FCF conversion rate helps evaluate the quality of a company’s cash flow generation.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |