Price-to-Free Cash Flow Ratio

Free cash flow is the pool that can pay dividends, reduce debt, or be reinvested without raising fresh capital. Pricing the equity against that pool is closer to an owner's question than pricing it against accounting profit.

Definitions differ. Some analysts use operating cash flow minus capital expenditure. Others adjust for stock-based pay or capitalised leases.

A low multiple is attractive only when free cash flow is repeatable. A single year of low spending, an asset sale, or a delay in payables can manufacture free cash flow that will not recur.

Growth companies can have tiny or negative free cash flow while building capacity. The ratio then looks expensive or undefined even if the projects are sound. Separate maintenance spending from expansion spending when you can.