Stock prices often look cheap or expensive based on profits alone. But profits don’t always tell the full story. To understand a company’s true financial strength, investors need to look at how much real cash the business actually generates.
Free cash flow is the cash a company generates after accounting for cash outflows to support operations & maintain its capital assets. It's the "real money" left for growth, debt repayment, or returning to shareholders.
Formula
P/FCFper share =Share Price ÷ FCF per share
or,
Low P/FCF Signal
1. Undervalued stock2. Strong and consistent cash generation3. Efficient business model
You’re paying less for every rupee of free cash flow the company produces.
High P/FCF Signal
1. High growth expectations2. Strong future cash flow potential3. OR an overvalued stock
Always confirm if future growth justifies the premium valuation.
P/FCF vs P/E
P/E Ratio uses earningsP/FCF uses cash
Unlike the P/E ratio (which uses earnings, an accounting figure), P/FCF uses actual cash. This makes it harder for companies to manipulate and gives a truer picture of financial health and operational efficiency.
How to Use P/FCF
Peer Check: Is the ratio lower than the industry average?Trend Check: Is the ratio improving or worsening over the last 5 years?Sector Check: Capital-heavy firms will always look different than asset-light ones.
The Price-to-Free Cash Flow Ratio is an indispensable tool for uncovering truly healthy and undervalued companies.