The Price to Free Cash Flow Ratio, or P / FCF Ratio, values a company against its Free Cash Flow. It is the Share Price of the company divided by its Free Cash Flow per Share. This is measured on a TTM basis and uses diluted shares outstanding.
This ratio is similar to Price to Earnings, but omitting purely "paper only" expenses. Some companies report high profits, but they can't turn those profits into cash! A company can't survive without cash, and if it can't generate it internally then it will have to turn to outside investors to support it, resulting in either share dilution or increased borrowing.
Free Cash Flow is the amount left over a company can use to pay down debt, distribute as dividends, or reinvest to grow the business. It is Operating Cash Flow minus Capital Expenditures. A more detailed definition would be:
(Earnings before Interest and Taxes * (1-Tax Rate) + Depreciation & Amortisation - Change in Net Working Capital - Capital Expenditure).
In general, the higher this measure, the more expensive the company. There are several advantages that the P/FCF holds over other investment multiples - most notably the fact that, in contrast to Earnings, Sales or even Book Value, companies have a harder time manipulating cash flow.
|P / FCF
|CQS New City High Yield Fund
|Twentyfour Select Monthly Income Fund
|Amicorp FS (UK)