EV to FCF ratio

The EV to FCF ratio divides a company's enterprise value by its free cash flow. It values the entire company, equity holders and debt holders combined, against the cash the business actually generates after covering its operating costs and capital expenditures, rather than against accounting profit.

The formula is:

The reason investors reach for this ratio instead of, or alongside, price to free cash flow is the same reason EV to EBITDA is often preferred over the P/E ratio. Enterprise value captures the whole capital structure, so it puts a heavily indebted company and a debt-free company on equal footing when comparing how the market values their cash generation. Price to free cash flow, by contrast, only reflects the equity portion, which can make a leveraged company look artificially cheap.

Because free cash flow already nets out capital spending, EV to FCF tends to be viewed as one of the more honest valuation multiples, it's harder to flatter with accounting choices than earnings-based multiples can be. It's especially useful for capital-intensive businesses where the gap between accounting profit and actual cash generation can be wide. A lower ratio suggests the market is paying less for each dollar of cash the company produces, though as with any multiple, it should be compared against similar businesses rather than read as cheap or expensive on its own.