Free cash flow to sales ratio

Definition

The free cash flow to sales ratio measures a company's ability to generate free cash flow from its sales revenue. It is calculated by dividing free cash flow by total sales, indicating operational efficiency and financial health.

5 Must Know Facts For Your Next Test

1. Free cash flow to sales ratio indicates how much free cash flow is generated for every dollar of sales.
2. A higher ratio suggests better liquidity and financial flexibility.
3. It helps assess a company's ability to fund operations, pay dividends, and make capital expenditures without relying on external financing.
4. The formula for the ratio is: Free Cash Flow / Sales Revenue.
5. This ratio is particularly useful in comparing companies within the same industry.

Review Questions

Related terms

Free Cash Flow:

Cash generated by a company after accounting for capital expenditures, crucial for evaluating financial flexibility.

Liquidity Ratio: Measures a company's ability to meet its short-term obligations with its most liquid assets.

Solvency Ratio: Assesses a company's ability to meet its long-term obligations and remain solvent in the long run.