← Business Metric: Financial (all topics)
Free cash flow & cash conversion
What it is
Free cash flow is operating cash flow less the capital expenditure needed to maintain the business. Cash conversion expresses it as a percentage of operating profit or EBITDA
It answers whether reported profit is actually turning into money
Impact on industries
- Far harder to manipulate than reported profit, since it reflects cash movements rather than accounting judgements
- It is what funds dividends, debt repayment and growth without dilution, so it determines strategic freedom
- Persistently weak conversion against strong profit signals working capital absorption or aggressive revenue recognition
- Growth capex and maintenance capex are hard to separate in practice, so free cash flow is sensitive to where the line is drawn