Cash Flow

FCF Conversion

How much of book net income comes in as actual free cash flow (FCF) — a metric for the quality of earnings.

In plain terms

Even when a company writes "earned $100M" on its books, not all of it comes in as bank cash. Sales made on credit are also booked as profit.

FCF conversion is the share of that book profit that remains as spare cash (FCF) you can actually use. With $100M of profit and $80M of FCF, the conversion is 80%. It measures "how much book profit turns into real cash."

What it tells you

It is a yardstick for "is this company's profit real." A consistently high conversion means a healthy structure where profit comes in as cash.

Conversely, a low or negative conversion is a reason to suspect that profit is tied up in receivables and inventory, or booked only on paper.

Formula

FCF conversion = FCF (operating cash flow − CapEx) ÷ net income × 100 (last 4 quarters)

What high or low means

Generally, 60% or above is read as healthy, below that as worth watching, and negative as a warning. The reasoning is that a large share of earned profit has to remain as cash to leave room for dividends, investment, and debt repayment.

In a phase of heavy CapEx for growth it can dip temporarily, so it is best read as a trend.

Caution

Looking at one year alone, it swings with CapEx timing (the same limit FCF has). In a heavy-investment year the conversion dips, so read the multi-year average to see the real quality of earnings.

When net income is a loss or near zero, the ratio is meaningless (the small denominator makes the number jump around).

Stock given to employees (SBC) is not counted as an expense in FCF, so even a good-looking ratio may come with shareholders' stakes being diluted. Look at the change in share count too.

Metrics to read alongside

FCF (Free Cash Flow)

The numerator of FCF conversion is FCF itself. Looking at FCF (is cash left over) with the conversion (what % of profit that is) lets you see cash-generating power from two angles.

Net Margin

If net margin is "how much is kept from sales," FCF conversion is "does that kept profit become real cash." Together they let you gauge both the quantity and quality of profit.

SBC (Stock-Based Compensation)

Even with high FCF conversion, large SBC (stock compensation) may mean that good cash came at the cost of diluting shareholders' stakes. Together they strip away the illusion.

See it in real stocks

Search US stocks on Stocklore to see FCF and other financial metrics alongside the sector average.

AAPL Apple Inc.MSFT Microsoft Corporation NVDA NVIDIA Corporation AMZN Amazon.com, Inc.Search stocks →

Exactly how Stocklore computes this metric (formula, thresholds, SEC source) is on the methodology page.

This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.