Free cash flow as a percentage of revenue: the share of each sales dollar left in cash after operating costs and capital spending.
Free cash flow margin is free cash flow divided by revenue. It shows how much of each dollar of sales the business keeps as cash once it has paid its operating costs, its working capital and its capital spending. Unlike EBITDA margin, it counts capitalized costs and the cash tied up in receivables, so it is the stricter profit figure in a Rule of 40 score.
Free cash flow margin = (operating cash flow − capital expenditures) ÷ revenue, all for the same period. Use trailing twelve months when quarters are lumpy.
Revenue of $50,000,000, operating cash flow of $9,000,000 and capital expenditures of $2,500,000 give free cash flow of $6,500,000 and a free cash flow margin of 13%.
Annual prepayments flatter it: collecting a year of subscriptions up front lifts operating cash flow before the revenue is earned. Capitalized software development moves cost out of operating cash flow, so check capital expenditures includes it. The full guide is Rule of 40.