Price to free cash flow (P/FCF) is an equity valuation metric that compares a company's per-share market price to its free cash flow (FCF).
This metric is very similar to the valuation metric of price to cash flow but is considered a more exact measure because it uses free cash flow, which subtracts capital expenditures (CAPEX) from a company's total operating cash flow, thereby reflecting the actual cash flow available to fund non-asset-related growth.
Companies can use this metric to base growth decisions and maintain acceptable free cash flow levels. A company's free cash flow is essential because it is a primary indicator of its ability to generate additional revenues, which is a crucial element in stock pricing.
The price to free cash flow metric is calculated as follows:
Price to FCF = Market Capitalization / Free Cash Flow
For example, a company with $100 million in total operating cash flow and $50 million in capital expenditures has a free cash flow total of $50 million. If the company's market cap value is $1 billion, it has a ratio of 20, meaning its stock trades at 20 times its free cash flow.
Because the price to free cash flow ratio is a value metric, lower numbers generally indicate that a company is undervalued and its stock is relatively cheap in relation to its free cash flow. Conversely, higher price to free cash flow numbers may indicate that the company's stock is somewhat overvalued in relation to its free cash flow.
Source: Investopedia, Price to Free Cash Flow: Definition, Uses, and Calculation
, accessed 25 April 2024, <https://www.investopedia.com/terms/p/pricetofreecashflow.asp>
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