How do you calculate a stock's price-to-free cash flow ratio?

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by tavares , in category: Stocks and Equities , a year ago

How do you calculate a stock's price-to-free cash flow ratio?

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1 answer

by garret_hahn , 10 months ago

@tavares 

To calculate a stock's price-to-free cash flow (P/FCF) ratio, follow these steps:

  1. Determine the company's free cash flow: Free cash flow represents the cash generated by a company after deducting operating expenses, taxes, and capital expenditures (CAPEX). This can be calculated using the formula: Free Cash Flow = Operating Cash Flow - CAPEX Operating Cash Flow can be found in the company's cash flow statement (usually the cash flow from operations section) of its financial statements. CAPEX is typically disclosed in the investing activities section of the cash flow statement or disclosed in the notes to the financial statements.
  2. Determine the market price per share: Obtain the current market price of the stock. This can be found online through financial websites or brokerage platforms.
  3. Calculate the P/FCF ratio: Divide the market price per share by the free cash flow per share. To get the free cash flow per share, divide the company's free cash flow by the total number of outstanding shares. P/FCF Ratio = Market Price per Share / Free Cash Flow per Share


The resulting ratio indicates the market's valuation of a company's free cash flow. A higher P/FCF ratio suggests the stock is relatively expensive, while a lower ratio may indicate potential undervaluation.