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.