Definition:

Free Cash Flow / Revenue is a financial metric measuring the proportion of revenue converted into free cash flow, indicating how efficiently a company generates cash from its sales.

Formula:

Free Cash Flow / Revenue = (Free Cash Flow) / (Revenue)

How to use the metric:

This metric assesses a company's financial health and operational efficiency. A higher ratio suggests that the company generates ample cash from operations relative to its sales, which can be a sign of strong financial performance and effective cost management.

Limitations:

The metric does not account for industry-specific factors or capital structure differences. It may also be affected by one-time cash inflows or outflows, which can distort the true operational efficiency of a company.

Applies to:

This metric works best in industries with stable cash flows and capital expenditures, such as consumer goods, technology, and pharmaceuticals, where cash generation efficiency is a key performance indicator.

Doesn't apply to:

It may not be as applicable to industries with high capital expenditures or fluctuating cash flows, such as utilities or real estate, where external factors and large, infrequent investments can heavily influence cash flow.

Summary:

Free Cash Flow to Revenue is a valuable metric for assessing a company's capacity to transform sales into cash, offering insights into operational efficiency and financial health. However, it should be utilized alongside other metrics and industry factors to achieve a well-rounded view of a company's performance.