# Price to Free Cash Flow

Search Dictionary

## Definition of 'Price to Free Cash Flow'

The price-to-free-cash-flow ratio (P/FCF) is a valuation metric that compares a company's stock price to its free cash flow. It is used to determine whether a company is overvalued or undervalued.

A high P/FCF ratio indicates that a company is expensive, while a low P/FCF ratio indicates that a company is cheap. However, it is important to note that the P/FCF ratio is not without its limitations. For example, a company with a high P/FCF ratio may be a good investment if it is expected to grow its free cash flow rapidly in the future.

The P/FCF ratio is calculated by dividing a company's stock price by its free cash flow per share. Free cash flow is the amount of cash that a company generates after paying for its operating expenses and capital expenditures.

To calculate a company's free cash flow, you can use the following formula:

Free cash flow = Net income + Depreciation and amortization - Capital expenditures

Once you have calculated a company's free cash flow, you can divide its stock price by its free cash flow per share to get its P/FCF ratio.

The P/FCF ratio is a useful tool for comparing companies with different capital structures and growth rates. However, it is important to remember that the P/FCF ratio is only one of many factors that should be considered when evaluating a potential investment.

Here are some additional things to keep in mind when using the P/FCF ratio:

* The P/FCF ratio is a forward-looking metric. It is based on a company's expected free cash flow, which can be difficult to predict.
* The P/FCF ratio is not adjusted for risk. A company with a high P/FCF ratio may be more risky than a company with a lower P/FCF ratio.
* The P/FCF ratio can be misleading for companies with negative free cash flow.

Overall, the P/FCF ratio is a useful tool for valuing companies, but it should be used in conjunction with other metrics to get a more complete picture of a company's value.

Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.

Is this definition wrong? Let us know by posting to the forum and we will correct it.