To perform industry comparisons, each metric should be calculated under the same set of standards. 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.

In theory, EBITDA should function as a rough proxy for operating cash flow.īut 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:

The output for FCF-to-EBITDA is ordinarily expressed in percentage form, as well as in the form of a multiple. Therefore, the FCF conversion rate can be interpreted as a company’s ability to convert its EBITDA into free cash flow. The formula for calculating the FCF conversion ratio comprises dividing a free cash flow metric by an accounting measure of profit.įor simplicity, we’ll be defining free cash flow as cash from operations (CFO) minus capital expenditures (capex). The idea here is to compare a company’s free cash flow to its EBITDA, which helps us understand how much FCF diverges from EBITDA. The free cash flow conversion rate measures a company’s efficiency at turning its profits into free cash flow from its core operations.

Free Cash Flow Conversion Rate Example Calculation.

FCF Conversion Rate Industry Comparisons.

Operating free cashflow