# Understanding Price to Free Cash Flow (P/FCF): Definition, Uses, and Examples

## What Is the Price to Free Cash Flow Ratio?

Price to free cash flow (P/FCF) is an equity [valuation](https://www.investopedia.com/terms/v/valuation.asp) metric that compares a company's per-share [market price](https://www.investopedia.com/terms/m/market-price.asp) to its [free cash flow](https://www.investopedia.com/terms/f/freecashflow.asp) (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](https://www.investopedia.com/terms/o/operatingcashflow.asp), thereby reflecting the actual cash flow available to fund non-asset-related growth.

The price to free cash flow ratio is the market capitalization divided by free cash flow. Price to free cash flow ratios can tell investors if a stock is undervalued or overvalued. Companies use this metric to manage growth and maintain acceptable free cash flow levels. It's important to monitor this ratio over time and compare it against industry norms for a clearer financial assessment.

### Key Takeaways

*   The price to free cash flow ratio assesses a company's stock value relative to its free cash flow, highlighting operational sustainability.
*   A low price to free cash flow ratio suggests a stock might be undervalued, offering a potential bargain for investors.
*   A high ratio could indicate that a company's stock is overvalued compared to its peers in the industry.
*   Investors should compare this ratio to those of similar companies and industry norms for a more accurate assessment.

## An In-depth Look at Price to Free Cash Flow Ratio

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:  

$\begin{aligned} &\text{Price to FCF} = \frac { \text{Market Capitalization} }{ \text{Free Cash Flow} } \\ \end{aligned}$

For example, a company with $100 million in total operating cash flow and $50 million in [capital expenditures](https://www.investopedia.com/terms/c/capitalexpenditure.asp) 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 - $1 billion / $50 million.

You might find a company that has more free cash flows than it does market cap or one that is very close to equal amounts of both. For example, a market cap of 102 million and free cash flows of 110 million would result in a ratio of .93. There is nothing inherently wrong with this if it is typical for the company's industry. However, suppose the company operates in an industry where comparable company market caps hover around 200 million. In that case, you may want to investigate further to determine why the business's market cap is low.  

> **Fast Fact**
>
> Unusual free cash flows or market caps compared to a company's size and industry should prompt further investigation. The business might be in financial trouble, or it might not—it's critical to find out.

## Practical Applications of the Price to Free Cash Flow Ratio

Because the [price to free cash flow ratio is a value metric](https://www.investopedia.com/articles/stocks/11/analyzing-price-to-cash-flow-ratio.asp), lower numbers generally indicate that a company is undervalued and its stock is relatively cheap in relation to its free cash flow. Conversely, a higher price to free cash flow ratio may indicate that the company's stock is somewhat overvalued in relation to its free cash flow.

Therefore, value investors tend to favor companies with low or decreasing P/FCF values that indicate high or increasing free cash flow totals and relatively low stock share prices compared to similar companies in the same industry.

> **Important**
>
> The price to free cash flow ratio is a comparative metric that needs to be compared to something to mean anything. Past P/FCF ratios, competitor ratios, or industry norms are comparable ratios that can be used to gauge value.

They tend to avoid companies with high price to free cash flow values that indicate the company's share price is relatively high compared to its free cash flow. In short, the lower the price to free cash flow, the more a company's stock is considered to be a better bargain or value.

As with any equity evaluation metric, it is most useful to compare a company's P/FCF to that of similar companies in the same industry. However, the price to free cash flow metric can also be viewed over a long-term time frame to see if the company's cash flow to share price value is generally improving or worsening.

## Potential Manipulations of the Price to Free Cash Flow Ratio

The price to free cash flow ratio can be manipulated by a company. For example, you might find some that preserve cash levels in a reporting period by delaying inventory purchases or their accounts payable payments until after they have published their financial statements.

Since reported numbers can be manipulated, it's crucial to analyze a company's complete financials for a full picture. Analyzing several reporting periods shows how a company uses cash and how investors value it.  

## What Is a Good Price to Free Cash Flow Ratio?

A good price to free cash flow ratio is one that indicates its stock is undervalued. A company's P/FCF should be compared to the ratios of similar companies to determine whether it is under- or over-valued in the industry it operates in. Generally speaking, the lower the ratio, the cheaper the stock is.

## Is a High Price to Free Cash Flow Ratio Good?

A high ratio—one that is higher than is typical for the industry it operates in—may indicate a company's stock is overvalued.

## Is Price to Cash Flow the Same As Price to Free Cash Flow?

Price to cash flow accounts for all cash a company has. Price to free cash flow removes capital expenditures, working capital, and dividends so that you compare the cash a company has left over after obligations to its stock price. As a result, it is a better indicator of the ability of a business to continue operating.