Free cash flow conversion (FCF conversion)
How much of reported profit turned into free cash. 1.0 means all of it.
Persistent conversion below one is the classic early sign that reported earnings are not real.
How it is computed here
Free cash flow / net income
Measured over the latest complete fiscal year, as filed. Filed under quality. Higher is the stronger reading, other things equal.
The readings, and where the lines come from
| Range | Reading |
|---|---|
| below 0.50 | Profit is not arriving as cash |
| 0.50 to 0.80 | Partial conversion |
| 0.80 to 1.00 | Most profit arrives as cash |
| 1.00 and above | Cash exceeds reported profit |
A practitioners’ convention, not an estimated boundary. Convention rather than an estimated boundary; 1.0 is the arithmetic point at which reported profit fully arrives as cash.
When it misleads
- A growth company funding working capital will convert below one for good reasons.
- A company that has stopped investing converts above one while quietly shrinking.
- Meaningless when net income is negative; the sign inverts.
- Net income here is the whole group's, including minority interests, where the filing reports it, because free cash flow is the whole group's too.
Questions
How is free cash flow conversion calculated?
Free cash flow / net income. Measured over the latest complete fiscal year, as filed.
What does free cash flow conversion tell a value investor?
Persistent conversion below one is the classic early sign that reported earnings are not real.
When does free cash flow conversion mislead?
A growth company funding working capital will convert below one for good reasons. A company that has stopped investing converts above one while quietly shrinking. Meaningless when net income is negative; the sign inverts. Net income here is the whole group's, including minority interests, where the filing reports it, because free cash flow is the whole group's too.