The Price / Free Cash Flow (PFCF) ratio is a value metric which defines the relationship between a stocks price per share and the underlying free cash flow of the company. Free cash flow is the operating cash flow, or the amount of excess cash generated by the business, minus capital expenditure.
A high PFCF could mean that a company is overvalued, a low PFCF could mean that a company is undervalued.
- We can compare a company’s PFCF to it’s industry to gauge how expensive the company is relative to that industry for an apples-to-apples comparison.
- We can also compare a company’s PFCF to its historical PFCF to gauge if it is cheaper vs. history.
Investors should aim to buy stocks with a lower PFCF versus either its industry or history.