Given the current dire credit conditions and overall economic gloom, financial analysts have a new ratio to play with: Free Cash Growth Profile. A report put out by the Georgia Tech Financial Analysis Lab and authored by Charles Mulford, director of the lab, and Sohel Surani, a research assistant there, displays how the free cash growth profile metric reflects the ability of a company to generate free cash flow while increasing revenue or “growing”, which more often than not is not the case. Very important in these times of limited sources of outside cash.
Free Cash Growth Profile is calculated by dividing free cash flow by revenue. So if a company has a free cash growth profile of 15% , that means it generated 15 cents of free cash flow for every sales dollar (or euro). As with all finacial analytical metrics, it’s best used in combination with others. But in the world of private equity, where free cash flows are poked, prodded, and dissected in every possible way, it’s something potentially useful to look at.
- Georgia Tech Financial Analysis Lab Report on the Free Cash Growth Profile Trends in Several Technology Industries – January 2009