India's own convention is FCF over PAT. The quality-investing culture there, from screener.in columns to Marcellus-style screens and most domestic fund commentary, expresses conversion as free cash flow over profit after tax:
FCF/PAT = (CFO − capex) ÷ profit after tax — cumulative over 5–10 yearsWhy cumulative? Single-year FCF is lumpy, because capex arrives in slabs and WC swings, and a ten-year sum washes the lumps out. Here are the reading bands, as rules of thumb, always paired with ROIIC:
| Cumulative 10-yr FCF/PAT | Reading |
|---|---|
| ≥ 80% | Compounder-grade conversion: profits are cash, reinvestment needs are modest |
| 50 – 80% | Normal for a grower; check the capex split (maintenance vs growth capex): if the shortfall is growth capex earning good ROIIC, this is fine; if it is maintenance, the profits are overstated |
| < 50% persistently | Demand answers: either a deliberate build phase (check with ROIIC and management's stated plan) or profits that exist mainly on paper |
| Negative across a decade | The business consumes owners' capital as a lifestyle. Only defensible with exceptional, measured incremental returns |
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What is a good FCF margin?
FCF margin = FCF ÷ revenue. It's the scale-free version, and the one that travels across sectors. At ≥ 15% it's elite, the territory of asset-light franchises like IT services, FMCG at scale, platform software. A margin of 8 to 15% is strong, and 0 to 5% is the natural habitat of capital-heavy industry. Persistently negative sends you back to the ROIIC test. Phase 5 will hand you the SaaS "Rule of 40" (revenue growth % + FCF margin % ≥ 40), and the FCF margin you compute here is that formula's second half.
You'll also meet FCF/EBITDA in broker notes, where it's called FCF conversion. The logic is CFO/EBITDA less capex intensity, and it's mostly useful for comparing capital-heavy peers. Compute it when the sector playbook asks. The two ratios above cover the rest.
How do TCS and Reliance compare on FCF conversion?
Here's a worked contrast to fix the bands. It's illustrative and modeled on ~FY25 scale, so pull the filings. Start with TCS: PAT ≈ ₹48,000 crore, CFO ≈ ₹48,000 crore and capex ≈ ₹3,000 crore, so FCF ≈ ₹45,000 crore. That's FCF/PAT ≈ 94% and an FCF margin ≈ 18% on ₹2.55 lakh crore of revenue. Compounder-grade on every dial. Now take Reliance Industries through the Jio build (FY13 to FY19). CFO was strong and growing, but roughly ₹5 lakh crore of cumulative capex swamped it, so FCF ran deeply negative for most of the stretch. Debt funded the gap, peaking around ~₹1.5 to 2 lakh crore net before the 2020 deleveraging (a ₹1.5 lakh crore rights issue plus stake sales). Over that window, FCF/PAT is meaningless as a quality verdict. Read it as a strategy readout instead. The judgment depends entirely on what the ₹5 lakh crore now earns, which is the ROIIC question from returns on capital, asked with a telecom empire attached.