Price to free cash flow ratio
Also known as: P/FCF, price to FCF
A ratio compares the price the market puts on a stock to something the company actually produces, its earnings, its assets, or its cash flow. It tells you how expensive a stock is relative to that measure, not just whether the share price is high or low in absolute terms.
Price to free cash flow divides market cap by free cash flow, showing how many years of current free cash flow it would take to earn back the price paid for the stock, assuming free cash flow stayed flat. It plays the same role as the price to earnings ratio, but uses free cash flow instead of net income, which strips out non-cash accounting items like depreciation and stock-based compensation.
The formula is: Market cap / Free cash flow.
This makes it useful for comparing companies whose reported earnings are distorted by heavy non-cash charges, or for checking whether a company's profits are actually showing up as real cash. A high P/FCF, like a high P/E, means investors are paying a steep premium for today's cash generation, on the expectation that it grows substantially from here.