What is P/FCF?
P/FCF measures how much you're paying for a company's actual cash generation. It's similar to P/E ratio but uses free cash flow instead of earnings, which is harder to manipulate.
Think of it like this
Imagine buying a vending machine that generates $100 real cash per year after all expenses. If you pay $1,500, that's a P/FCF of 15. You're paying 15 years of cash flow. Lower P/FCF means better value!
Formula
P/FCF = Market Cap / Free Cash Flow- Market Cap: Total company value (stock price × shares)
- Free Cash Flow: Cash after all expenses and investments (Operating Cash Flow - CapEx)
Why it matters
- Shows if you're paying fair price for actual cash generation
- More reliable than P/E - harder to manipulate cash
- Warren Buffett focuses on free cash flow
- Important for mature, cash-generating companies
What's a good value?
< 10
Undervalued
Strong cash generation relative to price
10-20
Fair Value
Reasonable valuation
20-30
Premium
Paying for growth or quality
> 30
Expensive
High expectations or overvalued
Real-world example
Apple P/FCF: ~15 - fair value for tech giant. Amazon P/FCF: 25+ - investors paying for growth. Utilities P/FCF: 8-12 - mature, steady businesses. High-growth startups: often negative FCF.
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