What is EV/FCF?
Enterprise value divided by free cash flow, showing how expensive a company is relative to the cash it generates.
Think of it like this
Like paying 15 years of rental income upfront to buy a rental property - lower is generally better value.
Formula
EV/FCF = Enterprise Value รท Free Cash Flow- Enterprise Value: Market cap + debt - cash
- Free Cash Flow: Operating cash flow minus capex
Why it matters
- More accurate than P/E for cash generation
- Accounts for debt levels
- FCF is harder to manipulate than earnings
- Useful for mature cash-generating businesses
What's a good value?
< 10
Cheap
Strong cash generation value
10-20
Fair
Reasonable valuation
20-35
Expensive
Paying premium
> 35
Very Expensive
High growth expectations built in
Real-world example
A company with $10B EV and $1B FCF has EV/FCF of 10 - you're paying 10 years of cash flow.
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