Price to Free Cash Flow
What is Price to Free Cash Flow?
Price to free cash flow is an equity valuation metric used to look at a company's per-share market price to its per-share amount of free cash flow (FCF). This measurement is basically the same as the valuation metric of price to cash flow however is viewed as a more careful measure, inferable from the way that it utilizes free cash flow, which deducts capital expenditures (CAPEX) from a company's total operating cash flow, consequently mirroring the genuine cash flow accessible to fund non-asset-related growth. Companies utilize this metric when they need to extend their asset bases either to develop their organizations or essentially to keep up with acceptable levels of free cash flow.
Understanding Price to Free Cash Flow
A company's free cash flow is important on the grounds that it is an essential indicator of its ability to create extra incomes, which is a vital element in stock pricing.
The price to free cash flow metric is calculated as follows:
Price to free cash flow = market capitalization value/total free cash flow amount
For instance, a company with $100 million altogether operating cash flow and $50 million in capital expenditures has a free cash flow total of $50 million. In the event that the company's market cap value is $1 billion, the company's stock trades at 20 times free cash flow - $1 billion/$50 million.
How Investors Use the Price to Free Cash Flow Metric
Since price to free cash flow is a value metric, lower numbers generally demonstrate that a company is undervalued and its stock is moderately cheap comparable to its free cash flow. On the other hand, higher price to free cash flow numbers might demonstrate that the company's stock is generally overvalued comparable to its free cash flow. Consequently, value investors favor companies with low or decreasing price to free cash flow values that demonstrate high or expanding free cash flow totals and generally low stock share prices. They will quite often keep away from companies with high price to free cash flow values that demonstrate the company's share price is somewhat high contrasted with its free cash flow. In short, the lower the price to free cash flow, the more a company's stock is viewed as a better bargain or value.
Likewise with any equity evaluation metric, it is generally helpful to contrast a company's price with free cash ratio to that of other comparable companies in a similar industry. Nonetheless, the price to free cash flow metric can likewise be seen over a long-term time period to check whether the company's cash flow to share price value is generally improving or declining.
Price to free cash flow ratio can be impacted by companies controlling the statement of their free cash flow on financial statements, by doing things, for example, safeguarding cash by postponing inventory purchases until after the period covered by the financial statement.
Highlights
- A lower value for price to free cash flow shows that the company is undervalued and its stock is generally cheap. A higher value for price to free cash flow demonstrates an overvalued company.
- Price to free cash flow is an equity valuation metric that shows a company's ability to produce extra incomes. It is calculated by separating its market capitalization by free cash flow values.
