Free Cash Flow · 2026-07-07

Free Cash Flow Conversion: What It Is and What's a Good Rate

What free cash flow conversion means, how to calculate it from EBITDA, what a good conversion rate looks like by industry, and how to improve it.

Free cash flow conversion measures how much of a company's earnings actually turn into cash — usually free cash flow divided by EBITDA, expressed as a percentage. It answers a simple but powerful question: for every dollar of operating profit, how many cents reach the bank as free cash? High, stable conversion is a hallmark of a quality business; low or erratic conversion is a red flag that earnings are not translating into cash.

How to calculate it

The common formula is free cash flow ÷ EBITDA. Because free cash flow deducts cash tax, CAPEX and the increase in working capital, the conversion rate captures exactly how much those three items erode reported profit. Some analysts use operating cash flow ÷ EBITDA or free cash flow ÷ net income instead — the principle is the same: compare cash out the bottom to profit at the top.

What a good rate looks like

There is no universal target, because conversion depends on the business model. Capital-light software companies often convert 60% to 80% or more of EBITDA into free cash flow. Capital-intensive businesses — manufacturing, telecoms, infrastructure — convert far less because they reinvest heavily. What matters most is the trend: conversion that is stable or rising signals discipline; conversion that is falling signals growing CAPEX or a working-capital problem.

How to improve conversion

The levers are the same items that separate profit from cash: collect receivables faster (lower DSO), hold less inventory (lower DIO), negotiate better supplier terms (higher DPO), and spend CAPEX efficiently. Small improvements in working-capital days can lift conversion meaningfully, which is why finance teams watch them closely.

What drags conversion down

When conversion is weak, the culprit is almost always one of three things: heavy capital expenditure (common in manufacturing, telecoms and infrastructure), a growing working-capital cycle that ties up cash faster than profit arrives, or a rising cash tax bill. Because these are the same items that separate free cash flow from EBITDA, tracking conversion is really a shorthand for tracking all three at once — a single number that flags whether earnings are genuinely turning into cash.

Use the trend, not the level

Because a 'good' conversion rate depends entirely on the business model, the level in isolation means little — 45% might be excellent for a factory and poor for a software firm. What is universally informative is the trend. Conversion that is stable or rising signals discipline and quality; conversion that is steadily falling is an early warning of overinvestment or a working-capital problem, often long before it shows up in profit.

Read your conversion directly

The EasyFinancialModels Free Cash Flow Forecasting tool reports free cash flow alongside EBITDA, so you can read conversion straight off the linked statements and test how changes in working-capital days or CAPEX move it. It's free for a 3-year forecast and downloads as an editable Excel model — no sign-up.

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