Price to Free Cash Flow
Price to Free Cash Flow (P/FCF) is a financial valuation metric that compares a company’s Market Capitalization to its free Cash Flow. It is calculated by dividing the company’s market value by its free Cash Flow. This ratio helps investors assess the relative value of a company’s Shares compared to the cash it generates, which can be used for dividends, rEINvestment, or debt repayment.
Formula: P/FCF = Market Capitalization / Free Cash Flow
Example: If a company has a Market Capitalization of $500 million and generates $50 million in free Cash Flow, the P/FCF would be:
- P/FCF = $500 million / $50 million = 10
Case: A tech company with a P/FCF of 15 might be considered overvalued if its historical average P/FCF is 10, indicating that investors are paying more for each dollar of free Cash Flow than in the past. Conversely, a P/FCF of 8 may suggest the company is undervalued if it consistently generates healthy free Cash Flow.