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Glossary

FCF vs net income

By Oliver Wakefield-Smith, Founder, Digital Signet. Verified against primary filings; see /sources.

Reconciling items

FCF > net income: what it says

D&A above CapEx, working capital releasing cash, or deferred revenue building. Asset-light or post-investment runoff. Generally healthy for mature businesses.

FCF < net income: red flag

Sustained below-100% conversion suggests aggressive revenue recognition under ASC 606[ASC 606], receivables build outpacing sales growth, or persistent CapEx above D&A without the offsetting growth showing in revenue.

Which figure goes in a valuation model

FCF. Net income is an accrual concept; valuation discounts cash. Use FCFF with WACC or FCFE with cost of equity.

See also